Sebi’s high-level committee for framing code on conflict of interest meets for the first time

A high-level committee of the Securities and Exchange Board of India (Sebi) met for the first time on May 16 to seek views from stakeholders to review and enhance the framework for managing conflicts of interest, disclosures, and related issues of Sebi members and officials, multiple sources told Moneycontrol.

The committee, under the chairmanship of Pratyush Sinha, retired IAS officer and former Chief Vigilance Commissioner, sought views from legal experts, market infrastructure institutions (MIIs), independent experts and other stakeholders.

MIIs include exchanges, depositories and clearing corporations.

According to sources, the meeting went on till late evening on Friday (May 16) and various suggestions were submitted.

As per one source who attended the meeting, suggestions were wide-ranging, including making all disclosures of Sebi board members public, instead of leaving it to the board cell of Sebi, to having an Ombudsman-like mechanism, independent from Sebi.

One of the invitees suggested that the existing structure of Chief Vigilance Officer (CVO) needs a re-look as it may have a conflict.

Suggestion on Banning Trading by Sebi Board Members?

Another source said that a complete ban on share trading by Sebi board members and officials was also suggested. Consistency in recusal from cases by board officials, instead of selective recusal, may also be looked at, suggested another invitee to the HLC.

A higher level of scrutiny by the parliamentary standing committee, as in the US, is required, so that proceedings are recorded for everyone to see, said the source quoted above.

Suggestions on a code on conflict of interests were also sought from legal experts. Some of them explained practices followed by regulators in developed economies. In these economies, private sector individuals are frequently appointed in regulatory positions and they return once the tenure is over. In some countries, the code prescribes criminality and penalty provisions.

MIIs also made their suggestions on avoiding a conflict of interest.

The code of conflict for exchanges and clearing corporations is covered in Stock Exchanges and Clearing Corporations (SECC) Regulation.

SECC regulations define a code on conflict of interest for key managerial persons of the exchanges, clearing corporations, and public interest directors appointed by Sebi. They include recusal from board meetings to disclosure to the board about conflict of interest.

All stock exchange employees, clearing corporations and depositories are not allowed to trade in securities regulated by them.

Restrictions on Spouses, Dependent Children 

Similar restrictions are also applicable for spouses and dependent children of employees of MIIs. But they are allowed to invest in mutual funds and PMS. Officials of exchanges and MIIs are not eligible for employee stock options (ESOPs).

Sebi’s existing code on conflict of interest for board members was voluntarily adopted by the board in December 2008, when CB Bhave was the Chairman. Read More

The code has not been modified so far. Though no other domestic financial regulator has such a code, they all have a clearly defined code of conflict for entities they regulate.

The existing code specifies the general principles to avoid conflict, procedures for declaration of interest or conflict as soon as it arises or where there is an apprehension of conflict. It also prescribes procedures for managing the conflict, procedures for public to raise the conflict of interest, disclosure of transaction in shares, maintenance of disclosures, acceptance of gifts, etc.

Other Regulations 

A Sebi board note on the HLC says that the code of conflict is in addition to the provisions of Sebi Act and various regulations applicable to Sebi board members, including the chairman and officials, like Sebi (Procedure for Board Meetings) Regulations.

Also, there is the Sebi (Terms and Conditions of Service of Chairman and Members) Rules, 1992 which are applicable in dealing with financial and other interest of members which are likely to affect or influence their functions as Members.

Sebi officials are also governed by Sebi (Employees’ Service) Regulations, 2001, which specifies the provisions on private trading, restrictions on investments, speculation in stocks, shares, investments, misuse of official position, acceptance of gifts, declaration and approvals relating to moveable, immovable and valuable property etc.

The regulations even restrict Sebi employees from requesting someone to buy insurance from a family member who is an insurance agent. Sebi employees are also covered under insider trading regulations.

The whole issue of conflict of interest started with the Hindenburg Report allegations against former Sebi Chairperson Madhabi Puri Buch. Hindenburg alleged that Buch and her husband made investments in an offshore fund of the Adani Group, and cited the same as reason for not investigating the case properly, though Buch and Adani group have denied the Hindenburg's allegations.

An email seeking comments from Sebi on the HLC meeting did not elicit any response.