Sucheta Dalal 
On October 24, the public accounts committee (PAC) of parliament is scheduled to meet officials of the finance ministry, regulators and tax departments and the Securities and Exchange Board of India (SEBI). The multi-party PAC, headed by Congress leader K.C. Venugopal, is expected to focus on conflict of interest charges levelled against SEBI chairperson Madhabi Puri Buch by both his party and by US-based Hindenburg Research.
The SEBI board and the finance ministry are pretending that no concern exists, while the SEBI chairperson and her husband, Dhaval Buch, have denied any conflict of interest.
The question is: What code of conduct has Buch adhered to? Is it the more stringent government of India regulations that govern her appointment, or the wishy-washy Code to Avoid Conflict (Conflict Code) of 2008, which is of doubtful legal standing, that appears to have deliberately diluted the government rules applicable to SEBI’s senior-most officials.
The Conflict Code, which was voluntarily adopted by the SEBI board in December 2008, has remained unchanged for over 16 years, even as the regulator has continuously introduced stricter compliance rules for investors, traders and market intermediaries. This raises an important question: Why has SEBI, while tightening regulations for all market intermediaries and investors, allowed such an outdated and voluntary code to remain in force?
We attempted to understand the genesis of the Conflict Code, since it is peculiar to the market regulator. The RBI and other regulators, like the insurance and pension authorities, who also have significant fiduciary responsibilities, have not felt the need for a separate Conflict Code. The top brass at these regulators are governed by government service rules which also apply to SEBI’s top officials. Therefore, the introduction of a separate code for SEBI is perplexing and mystifying.
SEBI stonewalled our attempt to obtain information and file notings under the Right to Information (RTI) Act. On October 15, it said in a reply, “The information sought by you pertains to the internal functioning of SEBI and relates to the systems and procedures followed at SEBI. The said information is strategic in nature, disclosure of which may hamper the decision making by SEBI in its supervisory and regulatory role. In view of the same, the information is exempt under Section 8(1)(a) of the RTI Act.”
However, it pointed us to the draft code and minutes of the August 2008 meeting of the SEBI board, which had made a show of great transparency with a decision to disclose the board agenda and discussions. The draft code reveals that G. Mohan Gopal, then a member of SEBI’s board, had suggested the framing of a separate code to address conflict among board members, but does not explain why he felt the need for it.
Gopal, a renowned legal mind and former head of the National Judicial Academy, would have had strong reasons to ask for such a code. Those who follow the capital market would remember that, in 2011, at the end of his SEBI term, Gopal had sent an explosive letter to the then-prime minister on the functioning of the SEBI board.
It is clear that the Conflict Code itself was adopted during Gopal’s stint on the board; hence, it is a mystery why this code would appear to dilute government rules, why it remains a ‘voluntary’ code after 16 years, and why various chairpersons have made no attempt to give it a legal sanctity.
In fact, the Conflict Code for whole-time members (WTMs) and the chairperson is far more lax than the rules that apply to all SEBI officials up to the level of executive director.
Advocate Murali Neelakantan points to a curious detail in the code. It says: “This Code shall be in addition to the provisions of Section 7 A of the SEBI Act, 1992 Rule 3 (1) and 19 A (1) of the SEBI (Terms and Conditions of Service of Chairman and Members) Rules, 1992, and Regulations 9 and 11 of the SEBI (Procedure for Board Meetings) Regulations, 2001.”
He is clear that the Conflict Code, which is a mere voluntary and additional guideline, cannot amend the SEBI Act, and Conditions of Service Rules notified by the Union government. Section 19 of the SEBI Act makes it clear that only the Union government has the power to make regulations for the chairperson and WTMs, or amend them.
Since there is no record of the Conflict Code being notified in the gazette of India, the dilutions permitted by it have no legal validity. Or, as advocate Neelakantan puts it, the Code itself is ‘void for lacking legislative competence’, since the board has no power to make these rules.
Remember, no other regulator has separate guidelines for their top officials, who are appointed and subject to Union government service rules. The same is true of the International Financial Services Centres Authority, 2019 as well as SEBI.
This means that every SEBI chairperson and WTM has to comply with the service rules and there is no room for dilution as envisaged by the Conflict Code.
Now, let us look at the many ways in which the Conflict Code of 2008 dilutes service rules.
First, Rule 3(1) of the SEBI service rules unambiguously says that the chairman/WTM “shall be a person who does not, and will not, have any such financial or other interests as are likely to affect prejudicially his functions as such Chairman or Member.”
There is no scope for the resolution of conflict by disclosure and recusal. Although Section 7(a) of the SEBI Act does refer to ‘disclosure of conflict’ by a member of the board, this can only apply to a part-time member appointed by the government who is a director of a company.
Secondly, ‘family’ means spouse and dependent children below 18 years of age. Why is this such a narrow definition, when directors of listed entities are required to disclose details for a much wider number of relatives (along with PAN details)? SEBI’s recently amended insider trading rules also have a wide range of ‘connected persons’.
If SEBI’s top brass, with far greater fiduciary responsibility and power over markets are permitted to ‘trade’, shouldn’t the rules have been far stricter and definitions more extensive? Why has it failed to include related parties and associates of regulated entities?
Also read: SEBI Chief Madhabi Buch’s Hour of Reckoning Is Fast Approaching
Thirdly, while government service rules do not contemplate any transaction in shares – this is also the norm with most credible overseas regulators – why does SEBI permit its top brass to ‘deal in shares’ so long as ‘substantial transactions’ by them and family are disclosed within 15 days and are not based on unpublished price sensitive information? (6.3 and 6.4 of the code).
A fourth curiosity is the procedure for the public to raise ‘conflict of interest’. Point 13 (1) of the code says, “Any person, who has reasonable ground to believe that a Member has an interest in a particular matter, may bring the same with material evidence to the notice of Secretary to Board.”
What exactly does the code mean by ‘any person’? Would Hindenburg Research have qualified as ‘any person’, if it had written to the secretary of the board, instead of going public? Would Pawan Khera of the Congress party, who has held several press conferences on this matter, qualify as ‘any person who has a reasonable ground to believe’ there was conflict? Would their allegations have to be handled differently if they wrote to SEBI with the evidence that has been provided and demanded action?
A charitable view of SEBI’s dubious Conflict Code remaining untouched for 16 years is that most appointees to the post of WTM and chairman have been government/public sector officials who are already subject to stringent service rules.
Jayant Varma of IIM Ahmedabad was perhaps the first private sector person to be appointed WTM, then there was T.C. Nair who came from Federal Bank – both finished their terms before the Conflict Code was adopted.
Buch, appointed in 2017, is the first private sector person to become WTM after 2008, followed by Ananth Narayan G. in 2022. This makes it the responsibility of secretaries of the finance ministry and the ministry of corporate affairs to have ensured that the legality of SEBI’s Conflict Code was examined and scrapped and that senior appointees complied with appointment and service rules of the government.
Perhaps the PAC headed by Venugopal will now ensure that this happens.
G Mohan Gopal did not reply to a WhatsApp message asking why he felt the need for a Code of Conflict for SEBI board members.
This article first appeared on moneylife.in. It has been lightly edited for style.