Syllabus
GS Paper II – Statutory, regulatory and various quasi-judicial bodies.
Context
Hindenburg Research has accused the chairperson of the Securities and Exchange Board of India (SEBI) of having a conflict of interest.
Securities and Exchange Board of India (SEBI) and Hindenburg Research
Introduction
Hindenburg Research has recently leveled serious allegations against the chairperson of the Securities and Exchange Board of India (SEBI), claiming a conflict of interest. These accusations have sparked significant controversy and debate within the financial and regulatory sectors. The research firm, known for its investigative reports, suggests that the chairperson’s actions may have compromised the integrity of SEBI’s regulatory functions. This development has raised questions about transparency and accountability within India’s primary securities market regulator, prompting calls for a thorough investigation to ensure the credibility and impartiality of the regulatory body.
Securities and Exchange Board of India (SEBI)
- Prior to the establishment of SEBI, the Controller of Capital Issues was the primary regulatory body, operating under the Capital Issues (Control) Act, 1947.
- Formation: SEBI was constituted in 1988 as a non-statutory entity to oversee the securities market. It gained statutory authority in 1992 with the enactment of the SEBI Act, 1992 by the Indian Parliament.
- Foundation: SEBI was initially set up in 1988 as an executive body and was later endowed with statutory powers in 1992 through the SEBI Act, 1992.
- Objective: The primary aim of SEBI is to safeguard the interests of investors in securities, foster the development of the securities market, and regulate it effectively.
- Governance: SEBI is administered by a board known as the SEBI Board.
- Chairperson: The chairperson is appointed by the Union Government of India.
- Members:
- Two members are from the Union Finance Ministry.
- One member is from the Reserve Bank of India.
- The remaining five members are nominated by the Union Government of India, with at least three being full-time members.
- Headquarters: SEBI’s main office is situated in Mumbai.
- Regional Offices: It has regional offices in Ahmedabad, Kolkata, Chennai, and Delhi.
Powers of SEBI
- Quasi-legislative Authority: SEBI has the power to draft and implement rules and regulations, including those related to obligations, insider trading, and disclosure requirements.
- Quasi-executive Authority: SEBI can inspect books of accounts and other critical documents to detect and gather evidence against malpractices.
- Quasi-judicial Authority: SEBI can adjudicate cases involving fraud and unethical practices in the securities market.
- Approval of By-laws: SEBI has the authority to approve the by-laws of securities exchanges to ensure their efficient functioning.
Functions of SEBI
- Investor Protection: SEBI’s primary function is to protect the interests of investors in securities and promote the development of the securities market.
- Amendment of By-laws: SEBI can mandate securities exchanges to amend their by-laws.
- Inspection of Accounts: SEBI can inspect the books of accounts and call for periodic returns from recognized securities exchanges.
- Inspection of Financial Intermediaries: SEBI can also inspect the books of accounts of financial intermediaries.
- Listing of Shares: SEBI can require certain companies to list their shares on one or more securities exchanges.
- Registration of Brokers: SEBI can mandate the registration of brokers and sub-brokers.
- Control of Malpractices: SEBI can take measures to control malpractices in the securities market by introducing new laws and technologies.
- Investor Education: SEBI plays a crucial role in educating investors about the workings of the securities market.
- Common Platform: SEBI serves as a common platform for portfolio managers, bankers, stockbrokers, investment advisers, merchant bankers, registrars, share transfer agents, and others.
Significance of SEBI
- Technical Innovations: SEBI has implemented numerous technological advancements to expedite trade settlements, including the T+2 settlement cycle introduced in 2023.
- Elimination of Physical Certificates: By replacing physical certificates with digital ones, SEBI has mitigated issues related to postal delays, theft, and forgery, thereby streamlining the settlement process.
- Data Seizure Powers: SEBI possesses the authority to seize data, including call records, from individuals or entities involved in securities transactions under investigation, ensuring transparency in exchange operations.
- Promotion of Self-Regulatory Organizations: SEBI encourages the formation of self-regulatory bodies and enforces measures to prevent fraudulent and unfair trade practices.
- Promotion of Market Growth: SEBI actively promotes the development of the securities market by introducing new regulations and technologies to enhance market efficiency.
- Comprehensive Supervision: SEBI provides thorough oversight of market participants, including brokers, sub-brokers, and other intermediaries, to maintain market integrity.
- Common Platform: SEBI serves as a unified platform for various market participants, including portfolio managers, bankers, stockbrokers, and investment advisers, facilitating coordinated market activities.
Conflict of Interests in SEBI
- Personal Interests and Associations: Any personal interest or association of a board member that could potentially influence the Board’s decisions, as perceived by an independent observer.
- Receiving Gifts: Board members accepting gifts, which could compromise their impartiality and decision-making.
- Past Employment or Roles: Holding or having held any position, employment, or fiduciary role within the past five years that may affect their current responsibilities.
- Trading on Unpublished Information: Engaging in share transactions based on unpublished, price-sensitive information, which undermines market fairness and transparency.
Regulation of Conflict of Interest in SEBI
- Conflict of Interest Code: SEBI introduced a distinct code titled ‘Code on Conflict of Interests for Members of Board’.
- Adoption Year: This code was adopted by the Board in 2008.
- Purpose: The code aims to ensure that SEBI operates in a manner that does not compromise its ability to fulfill its mandate or undermine public confidence in the Board members’ ability to perform their duties.
- Extensive Disclosures: The code mandates comprehensive disclosures and provides a mechanism for the public to report conflicts of interest.
- Preventing Influence: SEBI members must take all necessary steps to ensure that any conflict of interest does not influence the Board’s decisions.
- Shares and Family Holdings: Board members must disclose their shareholdings and those of their family within 15 days of assuming office.
- Substantial Transactions: Any significant transactions must be disclosed within 15 days of their occurrence.
- Unpublished Information: Members are prohibited from trading in shares based on unpublished, price-sensitive information.
- Other Offices: Members are not allowed to hold any other office of profit or engage in professional activities.
- Acceptance of Gifts: Members cannot accept gifts from regulated entities. If received, such gifts must be handed over to SEBI’s General Services Department.
- Previous Roles: Members must disclose any post, employment, or fiduciary position they hold or have held in the past five years in connection with any regulated entity.
Challenges in ensuring credibility of SEBI
- Confidential Disclosures: According to the ‘Code on Conflict of Interests for Members of Board’, disclosures are kept confidential except in specific situations. This can potentially lead to misconduct and cover-ups by unscrupulous individuals.
- Conflict of Interest Determination: The SEBI chairperson decides if a board member has a conflict of interest, while the board determines if the chairperson does. This process can result in quid pro quo arrangements.
- Public Disclosure Removal: The statutory requirement for public disclosure under the Lokpal and Lokayuktas Act was removed in 2016. It was replaced with a clause allowing the Union government to set rules for the form and manner of disclosures.
- Exemption from Disclosure: The Digital Personal Data Protection (DPDP) Act has amended the RTI Act to exempt all personal information from disclosure, raising privacy issues.
- Altered Selection Process: Allegations suggest that the structure of the search-cum-selection committee for recommending the chairman and whole-time members of SEBI has been modified.
- Directed Actions: There have been instances where SEBI was believed to be directed by the Finance Ministry to act in a particular manner, especially in cases involving certain business groups.
- Restrictive Authority: SEBI possesses extensive powers that allow it to impose significant restrictions on economic activities, often resulting in losses for the entities under suspicion.
Government initiatives and policies
- Right to Information Act (RTI): The RTI Act empowers citizens to request information from public authorities, including SEBI, promoting transparency and accountability in its operations.
- Business Responsibility and Sustainability Reporting (BRSR): SEBI mandates the top 1,000 listed companies to disclose their performance on Environmental, Social, and Governance (ESG) aspects, enhancing transparency and accountability.
- Enhanced Disclosure Norms: SEBI has introduced norms requiring large listed companies to confirm or deny price-sensitive market rumors and disclose material board decisions within 30 minutes.
- Market Integrity: SEBI has established mechanisms to prevent and detect fraud or market abuse, ensuring the integrity of the securities market.
- Code on Conflict of Interests for Members of Board: This code requires extensive disclosures from SEBI board members to manage conflicts of interest and maintain public confidence.
- Digital Personal Data Protection (DPDP) Act: This act amends the RTI Act to exempt personal information from disclosure, balancing privacy with transparency.
Steps to ensure transparency in SEBI
- Reform Codes and Laws: Amend relevant codes and laws to mandate the public disclosure of assets, liabilities, and conflicts of interest.
- Extended Disclosures: Ensure that disclosures encompass family members, close relatives, and other known associates.
- Historical Connections: Include information about past associations of the individual and their family members with any listed companies.
- Fair Enquiries: Establish impartial judicial or parliamentary inquiries to ensure fairness in investigations.
- Privacy Exemption: The Supreme Court has ruled that information related to assets, liabilities, and performance evaluations of public servants falls under the privacy exemption.
- Periodic Assessments: SEBI should conduct regular reviews of its activities to ensure it performs its duties effectively.
- Technological Integration: Embrace emerging technologies such as Big Data, Machine Learning, and Artificial Intelligence for enhanced performance.
Conclusion
Addressing conflicts of interest within SEBI is crucial for maintaining the integrity and trustworthiness of India’s securities market. Ensuring transparency, implementing stringent disclosure norms, and adopting advanced technologies are essential steps in this direction. By reforming relevant codes and laws, including comprehensive disclosures, and instituting impartial investigations, SEBI can uphold its mandate effectively. Continuous oversight and regular reviews will further enhance its credibility. Ultimately, these measures will foster a fair and transparent regulatory environment, bolstering public confidence in SEBI’s ability to safeguard investor interests and promote market development.
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Practice Question
Discuss the challenges faced by the Securities and Exchange Board of India (SEBI) in managing conflicts of interest among its board members. Suggest measures to enhance transparency and credibility within SEBI. (250 words)
Guidelines for Answer
- Introduction: Briefly explain the concept of conflict of interest and its relevance to regulatory bodies like SEBI.
- Body:
- Identify and elaborate on the specific challenges SEBI faces in managing conflicts of interest.
- Discuss the implications of these challenges on SEBI’s functioning and public trust.
- Suggest practical measures to address these challenges, including reforms in disclosure norms, transparency in operations, and adoption of advanced technologies.
- Conclusion: Summarize the importance of addressing conflicts of interest to maintain the integrity and effectiveness of SEBI.