SEBI chief lambasts market players on missing 'spirit of the law'

Madhabi Puri Buch, the chairperson of the Securities and Exchange Board of India

India’s capital market regulator wants market participants to honour the spirit of the law by sticking to a clean intent and refraining from finding loopholes to circumvent the rules.

Securities and Exchange Board of India (SEBI) chief Madhabi Puri Buch believes that stakeholders in the market must respect the spirit of the law in the absence of which the regulator will need to tighten rules further. “There is umpteen number of innovative malpractices in the market that keep us busy on regulation,” Buch said in a press interaction post-board meet on December 20.

Read: Retail investors have to bear the brunt of losses from brokers' tech glitches, says SEBI chief

Buch added that during the current year, SEBI has introduced 115 circulars of which 45 percent were towards liberalisation but 55 percent towards regulation.

Responding to a query regarding companies that announce buybacks simply to prop up their stock prices in the market, Buch drew a distinction between supporting share prices and propping them up artificially. The regulator is open to allowing companies to use the buyback route to support share prices so long as the firms provide an equitable exit to all shareholders. “To do it selectively in an inequitable way when only a handful of people know you are coming, that is not acceptable,” said Buch.

Buch added that the tender route for buybacks also supports share prices.

Share buybacks by companies have come under the radar after One97 Communications (Paytm) announced it would buy back its shares from the open market at Rs 850 a piece within a year of offering its shares for the first time to the public through an initial public offer (IPO) at lofty valuations. Paytm has been a big wealth destructor and many in the market have debated whether the buyback is justified when the company is not profitable.

Speaking on tightening norms on stock exchanges, Buch said there is a constant tussle between the letter and spirit of the law. The regulator finds it challenging to go after key management personnel when they are found to have violated or disregarded governance lapses at the firm. “Where have I violated the law as it is written? This is what we encounter,” said Buch.

The capital markets regulator had also come under fire after serious governance lapses were revealed at National Stock Exchange (NSE). A series of misconduct by its top management and lapses at the firm under the reign of Chitra Ramakrishnan came to light after SEBI began to investigate the exchange. The colocation scam under which it was found that select brokers colluded with insiders to take advantage of windfall profits was seen as a serious breach of governance. Further, Ramakrishnan was found to have shared privileged information about the firm with outsiders, violating laws.

The NSE scam has been a sore point with the regulator as the full extent of it is yet to play out. It has given raised concerns over the fiduciary nature of stock exchanges and the lapses that risk market stability. “Everywhere in the system, wherever there is wrongdoing, people are aware of it and they shrug their shoulders and say it is not my job. We are now making it their job, at least as far as MIIs are concerned,” Buch said. “We see silence also as complicit.”

SEBI has tightened norms for stock exchanges by categorising their verticals to avoid overlapping of critical functions such as risk management and regulation with other revenue-seeking ones such as business development.

Further, SEBI has also attempted to increase governance levels by mandating that key management personnel (KMPs) would be clearly defined in terms of hierarchy and importance of activities. Simply put, job descriptions of people in power and top management in stock exchanges would be clearly defined versus other employees.

That apart, a sharper code of conduct will be applicable to MIIs, the board, directors and KMPs. “Further, Board Members and KMPs will be held accountable if they are aware of wrongdoing(s) and do not appropriately report the same,” SEBI said.