The Securities and Exchange Board of India’s (SEBI) High-Level Committee (HLC), set up in March this year to review conflicts of interest and disclosure framework of its board members, has suggested a number of reforms.
This includes a multi-tier disclosure regime that involves the chairman, whole-time members and SEBI employees at the level of chief general manager (CGM) and above, being required to make a public disclosure of assets and liabilities statement. Other recommendations include investment restrictions, structured recusal processes and a robust whistle-blower system to safeguard investor interest and orderly functioning of securities market.
The move assumes significance since the regulator had formed the expert committee in March this year in the backdrop of former SEBI chief Madhabi Puri Buch facing allegations from now-defunct US-based short seller Hindenburg Research of conflicts of interest. The panel of experts was tasked with assessing the adequacy of SEBI’s framework regarding conflicts of interest and disclosure of interests, and to propose reforms aimed at enhancing transparency, accountability, and ethical standards.
Public disclosure for top brass
The committee recommended that the chairman, whole-time members (WTMs) and SEBI employees at the level of chief general manager (CGM) and above be required to make a public disclosure of the assets and liabilities statement, considering their responsibilities and discretionary powers.
“Applicants for the position of chairman and WTMs and for lateral entry positions must disclose actual, potential, and perceived conflict-of-interest risks of financial and non-financial nature to the appointing authority,” the committee said.
Uniform investment restrictions
The high-level committee proposed uniform application of restrictions on investments and trading to the chairman and WTMs as applicable to employees under the SEBI (Employees’ Service) Regulations, 2001 (SEBI ESR).It suggested including the chairman and the WTMs within the definition of ‘insider’ under the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015.
The committee said that the chairman, WTMs, and employees will be permitted to make new investments in any pooled vehicle if the scheme is professionally managed, and the market intermediary concerned is regulated by any financial sector regulator in the country. These investment restrictions, however, would apply to members and employees prospectively.
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Part-time members (PTMs), who do not handle SEBI’s day-to-day regulatory activities, are exempted from the investment restrictions. However, they would be obliged to make necessary disclosures, and not trade based on unpublished price-sensitive information (UPSI).
The investment restrictions would also apply to the spouse, irrespective of their financial status or the source of the investment, whether it isthe chairman, WTM, employee, or the spouse’s own money and relatives or other persons, who are financially dependent on them substantially.
After joining office, the chairman and the WTMs would be required to choose one of the four options for investment held by them – liquidate, freeze, sell them according to a trading plan, or sell them without a trading plan with prior approval.
Managing conflicts of interest
The committee examined the definition of family for board members to determine any conflict of interest. The current definition of family in clause 1(i) of the SEBI Code 2008 accounts for a spouse and dependent children under 18 years of age. In contrast, the SEBI ESR has a broader definition of ‘family’, which includes a spouse, children, and any other person who is related by blood or marriage to the employee or their spouse, and is wholly dependent on the employee.
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To maintain parity between board members and employees and bring in more transparency by aligning with international best practices, the committee recommended expanding this definition to include any person for whom the member/ employee serves as a legal guardian and any other person related by blood or marriage to the employee or to his spouse and is substantially dependent on such employee. This will apply to all board members and employees, including contractual appointees and those on secondment.
Robust recusal framework
The committee has recommended that SEBI institute a robust framework for recusal, given the role it plays in addressing situations involving conflicts of interest.
“The committee recommends that a summary of recusals by the chairman, WTMs/PTMs and SEBI employees of the level of chief general manager and above be published in the Annual Report of SEBI,” it said. Currently, recusals by the Chairman, WTMs/PTMs and employees are not made public.
Secure whistleblower system
The committee emphasised the role played by whistleblowers, and said a strong whistleblower system can safeguard institutional integrity beyond serving as a complaint channel.
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It recommended the establishment of a secure, confidential and anonymous whistleblower system for reporting actual, potential, or perceived conflicts of interest by board members, employees, and external stakeholders, including market infrastructure institutions, market intermediaries, market participants, and the public. It also noted the need for strong safeguards to protect complainants from retaliatory action.
Post-retirement restrictions
The committee said that a former member or employee may not appear before or against SEBI in any recognition, adjudication, settlement or approval matter for a period of two years from the date of retirement or from the date of being relieved from SEBI. This will be applicable to contractual employees, consultants, and advisors.
Other key reforms
The committee also recommended prohibiting the acceptance of gifts, directly or indirectly, by the chairman and the WTMs from any person with whom they have or are likely to have official dealings along the lines of the SEBI ESR.
It proposed a new ethics infrastructure under which an Office of Ethics and Compliance (OEC) and an Oversight Committee on Ethics and Compliance (OCEC) would be created.
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It also suggested the establishment of a secure, technology-based, state-of-the-art system that incorporates artificial intelligence and data analytics to prevent, predict, detect, and address conflicts of interest.
Why was the committee set up?
The regulator formed the expert committee in March this year after former SEBI chief Madhabi Puri Buch faced allegations from now-defunct US-based short seller Hindenburg Research, of conflicts of interest.
In August 2024, Hindenburg had alleged that Buch and her husband, Dhaval Buch, had a hidden stake in obscure offshore funds based in Bermuda and Mauritius linked to the Adani Group and were allegedly used in a money siphoning scandal. The Adani Group and the Buchs had denied the allegation.
The expert committee was tasked with determiningthe adequacy of SEBI’s framework regarding conflicts of interest and disclosure of interests, and to propose reforms aimed at enhancing transparency, accountability, and ethical standards.
The committee members
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The HLC comprised eminent former regulators, public officials, and industry leaders, chaired by Pratyush Sinha, a retired Indian Administrative Service (IAS) officer and former Chief Vigilance Commissioner.
Other members include Injeti Srinivas, former secretary, Ministry of Corporate Affairs & former chairman, IFSCA; Uday Kotak, Founder & Director, Kotak Mahindra Bank; G Mahalingam, former Executive Director, RBI and former Whole Time Member, SEBI; Sarit Jafa, former Deputy Comptroller and Auditor General; and R Narayanaswamy, former professor, IIM, Bangalore.
