Why India's market watchdog SEBI needs stricter controls

By Andy Mukherjee

Ignoring the credibility crisis at the very top of the Securities and Exchange Board of India won’t make it go away. Nor will chair Madhabi Puri Buch’s decision to stop answering questions about her potential conflict of interest prevent the opposition Congress Party or Hindenburg Research from asking them.

Buch, the first SEBI chief from the private sector, is yet to respond to the opposition party's repeated questioning of her income sources, though she was quick to deny the short seller’s criticism of her past investments.

Investments weren’t really a problem for her predecessors. They might have dabbled in stocks on their modest civil-servant salaries, but income from wealth was unlikely to have taken up much space in their tax filings. Unlike Buch, they didn’t own a consulting firm or have access to a segregated account in an offshore fund — two of the points in Hindenburg’s Aug. 10 report that questioned her objectivity. These gentlemen (they were all men) had government pensions, but no employee stock options from a regulated entity — an issue the Congress has made much of.

It will be a pity if the media glare on Buch prompts New Delhi to revert to reserving top regulatory jobs for retired or retiring civil servants. They covet these plum sinecures. But restricting the field could deprive institutions of talented outsiders who are genuinely interested in public service. Besides, government insiders don’t have a lock on perceptions of probity: Past SEBI chiefs have also attracted criticism, though usually for the directorships they accepted after leaving office. What needs an update is the code of service. With adequate financial controls, it may be possible for the right candidate to avoid being in the limelight for the wrong reason.

Buch’s silence after her response to Hindenburg’s allegations has added to the confusion. A media mogul, who’s being investigated by the market watchdog for allegedly siphoning funds from his company, has joined the melee and accused her of thwarting the sale of his beleaguered business. Some disgruntled officers have complained of a “toxic work culture” under Buch’s leadership. After the regulator denied those allegations in a five-page press release, some 200 employees staged a silent protest in the SEBI’s Mumbai campus last week.

Media reports suggest that parliament’s bipartisan public accounts committee could take up a probe into SEBI. However, it’s unclear if the panel will have the authority to question the chair about her personal finances, given the absence of an official document as its reference point.

After the Hindenburg report, Buch said that she disclosed all her interests, and followed a strict recusal policy. But the government that gave her the job may have needed to do more. At the minimum, she should have been asked to put her financial assets into a blind trust, where there’s minimal communication between her and the temporary overseer of her wealth.

There is no such rule. The SEBI’s policy on conflict of interest for board members does not ban trading, except on the basis of unpublished price-sensitive information. The organization’s terms of service merely state that the chairman will not have any financial interests that are “likely to affect prejudicially his functions.”

To see how a blind trust might have helped operationalize this, consider a specific allegation. The Congress Party has asked Buch to explain how she kept receiving income from ICICI Bank Ltd., her past employer, even after becoming a full-time member of the regulatory body in 2017 and its chair in 2022. Although Buch didn’t reply, ICICI said the income consisted of superannuation benefits following her 2013 retirement from the bank and gains from stock options awarded to her while she was employed.

Since Buch had a 10-year-long period in which she could convert the options, the government needed to ask itself what would be appropriate for the top markets regulator: a “qualified” blind trust or a stricter version? In the former, Buch would exercise her options and place her ICICI stock in the trust before joining the SEBI; in the latter, she would also sell the shares and park the proceeds with the manager. Still, even qualified blind trusts have been hard to enforce among lawmakers in Washington.

The Indian Supreme Court had appointed a committee after Hindenburg’s original short-seller report on the Adani Group cratered the conglomerate’s market value and kept it depressed for most of 2023. The panel said it lacked the evidence to return a finding of regulatory failure on the SEBI’s part. I have previously argued that the same experts should be asked to consider Hindenburg’s new report targeting Buch. However, now that the Congress has questioned her relationship with ICICI, the composition will have to change. K V Kamath, one of the committee’s six members, was the CEO of the bank for a part of Buch’s career there.

Any inquiry must be more than a postmortem. India needs concrete suggestions on how situations of potential conflict can be prevented from arising in the first place.

By hurling allegations in dribs and drabs, lawmakers opposed to Prime Minister Narendra Modi might keep this issue alive until parliament reconvenes in late November or early December. Their goal is to paint a picture of institutional decay and rampant crony capitalism under Modi’s decade-long control on power; the current crisis is just a backdrop. Its resolution in a way that will restore the SEBI’s credibility will be a welcome change for the Indian markets. But I’m not holding my breath.