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Informist, Friday, Aug 23, 2024

 

By Rajesh Gajra

 

In the last two weeks, the Securities and Exchange Board of India's reputation as an independent market regulator has taken a hard knocking following US short-seller Hindenburg Research's serious allegations of conflict of interest against SEBI Chairperson Madhabi Puri Buch in the matter of the regulator's investigation into Adani group entities. As a regulator, SEBI cannot meaningfully continue to function in such a state.

 

It will therefore, be a good step for the government to initiate an independent inquiry into the allegations of conflict of interest against the SEBI chief. Informist reported on Monday that the government is considering setting up a panel comprising a few whole-time and part-time members of SEBI, excluding the chairperson, that will include government representatives as well. This will be a good step to restore public confidence in the regulator and the chairperson.

 

Going back to the original issue, the very next day after Hindenburg made public its allegations, SEBI issued a press release on Aug 11 refuting these allegations. But this press release was not signed by anyone. The release stated that Buch made all disclosures and that the allegation of conflict of interest in Buch promoting real estate investment trusts as an emerging asset class was wrong since SEBI norms are modified only after extensive public consultations and market feedback. There was not much substance in the press release beyond this. The release also suggested that Hindenburg's credibility was weak since it had been issued a show-cause notice by SEBI for having short sold positions in shares of Adani group's listed entities before issuing its first report in January 2023. That report had alleged Adani promoter entities had used round tripping of funds through offshore funds and that they were guilty of hidden non-compliance of the minimum public shareholding requirement of 25%.

 

Without anything to suggest to the contrary, the unsigned press release cannot be taken as unbiased if the SEBI chief was involved in its issuance. The Securities and Exchange Board of India Act, 1992 gives the highest powers to the SEBI chairperson to manage day-to-day affairs. These powers are on par with those that the board in its entirety has. Therefore, unless specifically stated otherwise, any press release by the market regulator would have to be vetted and cleared by the SEBI chairperson. If the SEBI chairperson was indeed involved in vetting and clearing this press release, it would open both SEBI and the chairperson to another charge of conflict of interest.

 

This situation also appears to be the reason behind the government considering setting up a panel, excluding the SEBI chairperson, to investigate the issue. Conflict of interest is a serious matter, and as Informist wrote on Aug 12 SEBI's existing code on conflict of interest must be updated and made rigorous with the requirement to publicly disclose all investments and recusals, if any, of the whole-time board members and the chairperson.

 

If there are any concerns that a government-appointed panel investigating the issue amounts to interference in SEBI's autonomy, then it must be remembered that the government does have a role, mandated under two laws--the SEBI Act, and the Securities Contracts (Regulation) Act, 1956—from where the market regulator derives all its powers. SEBI has full operational autonomy and it should actually welcome an investigation by an independent panel.

 

The SEBI Act requires the government to appoint the chairperson and whole-time members, and also to nominate one official each from the finance and corporate affairs ministries. The Act also empowers the government to remove a SEBI board member from office if in its opinion, a board member has "abused his position so as to render his continuation in office detrimental to the public interest." Hindenburg has insinuated that such an abuse has already taken place so far as the investigation into the Adani group is concerned.

 

The matter is indeed grave. For a moment, forget the Hindenburg allegation of laxity in the Adani investigation. The fact that the SEBI chairperson owned 99% shares in consulting company Agora Advisory Pvt Ltd as of Mar 31, 2024, which generated revenues of nearly 24 mln rupees in three financial years from 2021-22 (Apr-Mar) to 2023-24, is not just a conflict of interest, it is a damning indictment! Buch assumed office as chairperson from Mar 2, 2022 and prior to that she was the whole-time member from Apr 5, 2017 to Oct 4, 2021.

 

Hindenburg has alleged that in 2021-22 when Buch was the whole-time member till Oct 4, 2021, and the chairperson from Mar 2, 2022, Agora Advisory's revenue was 19.88 mln rupees. This was 4.4 times more than the annual consolidated salary of about 4.50 mln rupees fixed by the government when the order appointing her as a whole-time member was issued in March 2017.

 

SEBI's existing code on conflict of interest expressly states that a whole-time member, and that will cover the chairperson as well, "shall not hold any other office of profit." If having a 99% stake in a consulting company that is generating revenues higher than the salary is not holding an office of profit, then what is? This calls for prompt attention and action from the government under the responsibilities given to it under the SEBI Act.

 

The Constitution of India provides for disqualification of an elected Member of Parliament or state legislature if he or she is found guilty of holding any office of profit. The degree of propriety demanded from seniormost officials in regulatory bodies must at least be the same if not higher.

 

Therefore, the faster an independent investigation is conducted through the potential panel that the government is mulling setting up, the better it will be for the credibility of SEBI, and perhaps for that of the chairperson.

 

Further, the Hindenburg allegations also raise serious questions about the role of the SEBI chairperson's husband Dhaval Buch since he holds directorships in a few companies, including in one listed company. For instance, Dhaval Buch is a non-independent, non-executive director in EPL Ltd, a listed entity, where the Blackstone Group has a majority stake post-acquisition in 2019. He is a senior advisor to Blackstone, and on the board of EPL since April 2021. He also holds directorships in unlisted entities Mahindra eMarket and Bristlecone India.

 

Hindenburg, in its Aug 10 allegations, insinuated that the SEBI chairperson, through the use of her position, was indirectly aiding her husband's business interests.

 

While the government and banks have in recent years tried to clean up the corporate environment by checking for 'politically connected persons' during credit appraisals, there now seems to be a need for listed companies to mandatorily disclose any connections to government and regulators. Shareholders in listed companies not only get disclosures about related party transactions, they also now have the power to vote on and veto such transactions if they cross a particular threshold. Surely, they also need to know that their investments may be at serious risk if another type of ‘related party’ relationship becomes public for some reason?  End

 

Edited by Vandana Hingorani

 

 

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