Redesigning Regulatory Integrity: Addressing Conflicts of Interest in SEBI’s Board Structure

[Kumar and Navjot are students at National Law University Delhi.]

The significant mandate of regulating India’s securities markets entails a profound responsibility towards investors, market institutions, and the broader national economy. While the Securities and Exchange Board of India (SEBI) is entrusted with this critical role, a pertinent question emerges: who oversees the conduct of the Board itself? The 2005 initial public offering scam exposed this regulatory lacuna and highlighted the necessity of a formal mechanism to govern the ethical conduct of SEBI Board members. This culminated in the introduction of the inaugural “Code on Conflict of Interests for Board Members” (CoI Code) in December 2008.

On one hand, other regulatory frameworks such as the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR), the SEBI (Prevention of Insider Trading) Regulations 2015 (PIT Regulations), and the Securities and Exchange Board of India (Employees' Service) Regulations 2001 have established robust disclosure and compliance mechanisms for various market participants, including SEBI’s own employees. But, comparable standards of rigor are conspicuously absent in the case of SEBI’s board members.

This discrepancy was brought into sharp relief by recent controversies, particularly surrounding former SEBI Chairperson Madhabi Puri Buch where allegations initially raised by US-based Hindenburg Research suggested her and her spouse's financial involvement in offshore entities linked to the Adani Group, which was under SEBI scrutiny. While Buch denied all accusations, the episode underscored material weaknesses in the prevailing conflict-of-interest code, prompting her successor, Tuhin Kanta Pandey, to establish a high-level committee for a comprehensive review of Board governance.

In the heads that follow, the authors discuss how the CoI Code falls short of aptly regulating the potential instances of conflict of interest, especially in light of the tech related advancements that have taken place over time. While building and relying on practices that have emerged across jurisdictions, we make 3-pronged recommendations which might help building a robust securities regulatory framework.

Establishing the Office of Ethics and Conflict of Interest Regulation (OECIR)

The concern regarding potential existence of conflict of interest, deontologically considering, can be well resolved by establishing an office that has an autonomous oversight and possesses no interest in any terms with the information being processed. The US' Securities Exchange Commission (SEC) has the Office of Ethics Counsel which primarily caters to this need. The office advises and regulates the members of the SEC over their personal transactions which might potentially amount to a case of conflict of interest.

The role of the OECIR can be further strengthened by ensuring autonomy in its functioning and independent appointment. Ensuring independence of the oversight body from internal influences and possible biasness has been a matter of recurrent significance across regulatory domains. In 2003, the Central Vigilance Commission Act was passed, which through its neutral appointment body ensured that the committee’s autonomy in monitoring vigilance activities is not tainted with allegations with biasness. Similarly, the New York City Conflicts of Interest Board, which administers the provincial conflict of interest laws, is formulated by a neutral appointment body which consists of distinct stakeholders (see Section 2602), to ensure the autonomy in its functioning.

To further strengthen the independence in functioning of OECIR, it can be made to report to authorities external to SEBI, such as the office of Comptroller and Auditor General (CAG). Such external reference of the recommendations made by the OECIR would ensure that the conduct of the Board Members can be subject to vigilance by an authority which has no direct interest in the securities’ regulatory framework. However, this suggestion comes with its own challenges as the scope of the CAG to regulate the conduct of SEBI’s Board would have to be provided for through a significant legislative overhaul.

Mandating a Cooling Off Period

Concerns arise when former members of regulatory boards, such as SEBI, transition almost immediately into commercial roles, particularly as independent directors in listed companies. This is not merely a technicality; it raises serious issues about the potential for regulatory capture, which can erode years of institutional credibility and reform. Additionally, this also raises concerns for the market participants as there needs to be a distinction between the regulator and the regulated. It is also pertinent to note that SEBI itself acknowledges potential risk of conflicts arising in appointment of such positions. For instance, under the LODR, there is a mandatory 3-year cooling-off period for former employees or key managerial personnel of a promoter group before they can be appointed as independent directors. Yet, an individual who once served as the regulator of a listed company faces no such limitation.

SEBI’s own employee service regulations recognize the potential of conflict, mandating a one-year cooling-off period after retirement for any board employee. This aims to prevent any unfair advantage arising from being privy to sensitive and influential information. However, when one examines the CoI Code, it fails to even contemplate the possibility of conflicts arising when a former board member moves into a corporate role shortly after demitting office.

Reference can be made to the practice followed in other regulatory regimes when it comes to dealing with such conflicts. For example, the European Securities and Markets Authority requires thorough post-employment compliance checks. Further, the Organisation for Economic Cooperation and Development also has emphasized that cooling-off periods are vital not only to prevent undue influence but also to reinforce a culture of regulatory independence by drawing a clear boundary between the regulator and the industry.

Practices like a mandatory 2-year restriction applicable on all former SEBI board members, preventing them from taking up board-level roles in listed companies or entities regulated by SEBI can be incorporated within the CoI Code. In addition, there should be a defined list of prohibited engagements like consultancy, legal advisory, lobbying, or other forms of involvement with any entity that was under investigation or scrutiny during the board member’s tenure for a period of 5 years. All post-tenure appointments must be publicly disclosed and reviewed by a designated body, such as the Board Evaluation and Compliance Monitoring Committee, with decisions and reasons formally recorded. If an appointment is permitted after the cooling-off period, both the company and the former SEBI member should be required to submit a recusal certificate to ensure transparency and accountability. 

Avoiding Conflicts by Restricting Trade 

Imposing trading restrictions on SEBI board members is essential, given the extraordinary powers they wield under the SEBI Act 1992. Section 11 empowers them to gather market-sensitive intelligence on listed companies and to oversee critical infrastructure such as the NSDL and stock exchanges. Without clear limits on their personal trading, these individuals could unintentionally or deliberately exploit confidential information, undermining market integrity.

In leading jurisdictions like the US and the UK, regulators are barred entirely from trading in securities; in many cases, they must divest existing holdings before assuming office. SEBI’s own service regulations similarly prohibit its staff from holding direct or indirect equity interests. Yet, the current CoI Code remains silent on these safeguards. A high-level committee is studying investment restrictions, but concrete measures have yet to emerge.

To bridge this gap, the “blind trust” model advocated by former SEBI Chair M Damodaran could be adopted. Under this arrangement, a member’s shares are placed in an independently managed trust, freeing them from buy-or-sell decisions. Complementing this, the PIT Regulations illustrate the value of pre-approved “trade plans,” overseen by a compliance officer, to ensure that any permitted transactions are transparent and beyond reproach.

Conclusion

The measures proposed herein above are some of the key suggestions which the committee should deliberate upon. Incorporation of these standards would only make the governance framework of SEBI’s Board more resilient and transparent. Incorporating some of the suggestions made above - such as instituting an autonomous Office of Ethics and Conflict of Interest Regulations - might require substantive changes to be made in the entire regulatory framework, possibly through legislative amendments, while the other suggestions made such as having cooling-off period might be more conveniently incorporated as they are to act as mere add-ons in the already existing robust framework.

The committee’s recommendations could prove to be a pivotal opportunity to ensure accountability and ethical standards in the securities regulatory framework. By incorporating the leading global standards such as those of SEC, the reforms could help in not just re-assuring the credibility of the country’s regulatory regime but would also reaffirm the trust of the larger populace in SEBI’s commitment to have a transparent and impartial securities market.