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Informist, Monday, Aug 12, 2024

 

By Rajesh Gajra

 

US-based Hindenburg Research accused the chairperson of the Securities and Exchange Board of India, Madhabi Puri Buch, of conflict of interest in a couple of matters - the Adani group case and the promotion of real estate investment trusts. Of course, Buch, in her personal capacity, and SEBI as a regulatory institution, have defended themselves arguing that there never was any conflict of interest.

 

Hindenburg Research appears to have assumed, and wrongly so, that the Indian capital market regulator has no system of checks and balances to prevent any damage to the market integrity from such egregious conflicts of interest. SEBI does have a code on conflict of interest for members of the board, including the chairperson, that was adopted by the board in December 2008.

 

Not only is this code's aim high, that the SEBI board conduct itself without undermining the public confidence in the ability of members to discharge their responsibilities, the detailing is robust. It is visible upfront in the code's definition of conflict of interests as "as any personal interest or association of a Member (including the chairperson) which is likely to influence the decision of the Board in a matter, as viewed by an independent third party."

 

The general principles in the code include disclosure of interests by a member in conflict with his duties. In the Hindenburg-Buch matter, not only has Buch clarified in a joint statement with her husband that her shareholding in two consulting companies were explicitly part of her disclosures to SEBI but the market regulator also in its own statement confirmed that Buch disclosed from time to time her holdings of securities and their transfers.

 

So far so good. But the code's yardstick is "as viewed by an independent third party." While this is an onerous but good yardstick, can we conclude that the conduct of SEBI and its chairperson, in the current case, meets this standard? Are disclosures by a chairperson to the board alone enough, or should these be vetted and monitored by an independent panel sitting above SEBI's board?

 

SEBI's statement that Buch made the disclosures is fine, but this only satisfies the letter of the law, so to say. What the SEBI board did with those disclosures is what really matters and the insinuations in Hindenburg's allegations are about the action, or lack of action, taken by the regulator as an institution.

 

The market participants and investors will never know what the SEBI did or did not do, unless the code requires compulsory public disclosure by the market regulator. The code on conflict of interests for members of the board was framed in December 2008, and more than 15 years have passed. The time is right for a review and deepening of the code.

 

Another point thrown up by Hindenburg in response to the joint statement by the Buchs requires attention. In the statement, they said that the two consulting companies set up by Madhabi Puri Buch became immediately dormant on her appointment at SEBI. But, according to Hindenburg, quoting documents from the corporate affairs ministry, Buch still held 99% stake in the Indian consulting entity and in the three years till 2023-24 (Apr-Mar) the firm generated total revenue of 23.99 mln rupees.

 

Factual misreporting is something SEBI does not take lightly when it comes to financial statements of listed companies. The same rigour needs to be built into the code on conflict of interests for SEBI board members. If Hindenburg's allegation has merit, then it must be viewed seriously by the SEBI board.

 

Hindenburg had also alleged that during Dhaval Buch's time as advisor to Blackstone which had large investments in real estate investment trusts, Buch, as SEBI chairperson, was actively promoting REITs as her favourite asset class and encouraging investors to be positive about it. The Buchs said in their joint statement that the Blackstone group was immediately added to Madhabi Puri Buch's recusal list maintained with SEBI.

 

She said that all recusals had been diligently followed as per the code of conduct. But instead of a mere recusal, Buch should have taken care not to promote the financial product as her favourite asset class. This will remain a contentious point in the interpretation of the code by any independent market participant or investor. SEBI must therefore plug the loophole and widen the scope of the recusals. It must also require public disclosure of all recusals by a member or the chairperson.

 

The principle of recusal is widely followed by the judiciary worldwide. It is pertinent to note how this principle works in the judiciary: when one judge recuses herself or himself from a case, another judge takes up the case. There is no relationship between these two judges save that of being a judge of the same court.

 

Even if the Chief Justice were to recuse herself or himself, the relationship between the Chief Justice and other judge or judges hearing that case is different from that of the SEBI chairperson with other SEBI board members. This is an important enough reason to not rely on recusal in the case of the SEBI chairperson and board members. Also, recusing oneself as a judge because one knows the plaintiff or the defendant or has done work with them is very different to recusing oneself because the matter being considered involves your spouse.

 

There is also the issue of Buch being involved in an investment decision pertaining to her husband's investment in the same offshore fund that Hindenburg alleged was linked to Vinod Adani-controlled entity when she was a whole-time member. On Feb 25, 2018, nearly 11 months after she joined SEBI as a whole time member, she wrote to the fund on behalf of her husband seeking redemption of his investment. Even if this was a mere communication, it shows a serious lapse of judgement on her part.

 

This investment was in their joint name till Mar 22, 2017 which was two weeks before her tenure as SEBI whole time member commenced and it is a fair point that the investment was made when they were both private citizens living in Singapore. Further, the disclosures were made to SEBI, according to Buch and the market regulator.

 

However, the question that comes up is whether the SEBI board was aware that the offshore fund was possibly linked to Adani group entities in its investigations. SEBI told the Supreme Court last year that it could not get conclusive information from overseas regulators and agencies about the end beneficiaries of the foreign funds invested in Adani group entities. In its January 2023 report, Hindenburg had alleged that the foreign fund holdings in Adani group companies were actually the promoters' own funds routed through offshore entities and were intended to bypass the minimum public shareholding norms. However, the Adani group had denied these allegations.

 

If the SEBI chairperson had recused herself from the regulator's investigations into the Adani group, then there would be no merit in any allegation of conflict of interest. But shouldn't that also have been disclosed to the public at that time itself?  End

 

Edited by Ashish Shirke

 

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