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Informist, Wednesday, May 28, 2025

 

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--SEBI Pandey: Independent panel set up to review conflict of interest code
--Pandey: Conflict of interest code breach claims against SEBI an overhang
--SEBI Pandey: Disclosure norms for board members, employees were outdated
--SEBI Pandey: Old code of conflict of interest silent on public disclosures
--SEBI Pandey: Independent panel to recommend new conflict of interest code
--CONTEXT: SEBI Chairman Tuhin Pandey comments in interview with Informist
--SEBI Pandey: Trust is extremely important for an institution
--SEBI Pandey on ethics panel: You want effective regulator, not a timid one
--SEBI Pandey: Ample freedom to panel on conflict of interest code
--SEBI Pandey: New code on conflict of interest will create right balance
--Pandey: New conflict of interest code will bring clarity to SEBI officials
--SEBI Pandey: Need to know if mkt players using F&O as purely a casino
--SEBI Pandey: Don't want educational qualification as entry barrier to F&O
--SEBI Pandey: F&O data on investor gains, losses for FY25 being compiled
--SEBI Pandey: Will not permit manipulators to operate in F&O market
--SEBI Pandey: NSE IPO application not something that cannot be sorted
--SEBI Pandey: Want to ensure clearing corporations are well funded
--SEBI Pandey: To constantly engage with mkt players on algo trading
--SEBI Pandey: Want to simplify regulations, reduce cost of compliance
--SEBI Pandey: Will talk to industry over few months on simplifying norms
--SEBI Pandey: To simplify norms without diluting risk mitigation
--SEBI Pandey: See merit in concept of shareholders in control vs promoters
--SEBI Pandey on Adani group case: No comment on individual cases
--SEBI Pandey: Secondary bond market dominated by institutions, banks
--SEBI Pandey: People don't understand bond mkt as well as equity
--SEBI Pandey on SME listings: Saw cases of retail investors taken for ride
--SEBI Pandey on SMEs: In exuberance, investors ignore where they invest
 

 

By Rajesh Gajra, Anjana Therese Antony, and Anshul Choudhary

 

MUMBAI - Former finance secretary Tuhin Kanta Pandey must have been a worried man on Mar. 1, a Saturday, when he took over as the eleventh chairperson of the Securities and Exchange Board of India. There was a gaping hole in the market's trust on the securities market regulator due to allegations of conflict of interest against his predecessor Madhabi Puri Buch following reports by US' Hindenburg Research against Adani group as also the propriety of drawing substantial income from other avenues while being the SEBI chairperson.

 

"After all, you are not immune to the news," the SEBI chairman said in an interview with Informist. Pandey was referring to the negative narrative in the media raising questions about SEBI's credibility. There was an overhang in the market on SEBI's code on conflict of interest for its board members. According to Pandey, trust is extremely important for an institution and with respect to securities market regulator, a certain level of transparency is also expected.

 

Pandey said he wanted to first clear this trust deficit problem and that is why he announced the setting up of an external independent high-powered committee to review SEBI's internal code on conflict of interest for board members with much larger terms of reference than anyone could have imagined. The setting up of this panel is also unique among global securities market regulators grappling with similar conflicts of interest.

 

The new SEBI chairman is also taking forward the resolve to control the hyper trading activity in the equity derivatives market. After the tightening of rules around weekly index derivatives contracts and related areas in Oct. 1, SEBI is moving forward with more measures. According to Pandey it is important for any regulator to know whether the players in a market are "truly playing a game, or is it just purely casino," that has the potential to destabilise the entire market.

 

At the same time, however, Pandey does not want to set entry barriers such as educational qualifications as suggested by the head of National Stock Exchange of India recently. "How do we know? I mean, person without passing an exam may be actually an expert in market," Pandey said.

 

Pandey is also not hassled with the continuous bombardment by media and others on the issue of National Stock Exchange of India's initial public offer application awaiting the market regulator's approval. "It is not a big deal," he said and added it is not something that SEBI cannot sort out. He refused to confirm a recent Bloomberg story that the NSE had offered around INR 10 billion to settle a longstanding dispute with SEBI.

 

Incidentally, the Securities and Appellate Tribunal had in early 2023 overturned a SEBI order against NSE in the colocation case. SEBI had, in April 2019, issued a disgorgement order against NSE for INR 6.25 billion for breach of norms in the case. SEBI later appealed against SAT's order in the Supreme Court where the case is still pending.

 

Pandey is also clear in his mind about the stance SEBI has taken under the leadership of his predecessor that clearing corporations should become independent from their parent exchanges. He said the core principle is simple: SEBI wants to ensure that clearing corporations are well funded--their settlement guarantee fund has robust corpus to provide teeth to the legal counterparty guarantee in the settlement of trades on the stock exchanges.

 

Some in regulatory circles had argued that conceptually SEBI should not have allowed stock exchanges to get listed. The SEBI chairman does not, however, agree with that view. He believes SEBI has enough regulatory powers to ensure compliance on part of stock exchanges irrespective of whether they are listed or unlisted. Both types of entities, listed and otherwise, have to comply with the rules and take care of public interest, he said. As such it makes no difference if such market infrastructure institutions are listed or not, he added.

 

Slow and steady is now going to be the path for the settlement cycle in the cash market to move to the mandatory T+0 cycle from T+1. The SEBI chairman is not looking to push the T+0 settlement in a major way for now and it will remain optional. He is wary of effecting sudden changes in the settlement cycle since this could lead to other problems and have a cascading effect.

 

The buzz among retail investors around algorithmic trading and the potential risks it may pose does not disrupt the SEBI chairman's thinking. Pandey said SEBI is conscious of the risks, the fast-changing technologies used for algo trading, and is constantly engaging with market participants.

 

Pandey is emphatic when he points to SEBI's endeavour to simplify regulations and reduce any micro-management for which he will talk to industry members and other concerned parties over the next few months to understand their issues. "Without, you know, any way diluting the risk mitigation, wherever we could simplify we should do and reduce the cost of compliance," the SEBI chairman said. SEBI will carry out data and other analyses to identify areas where the regulations can be simplified, he said.

 

The willingness to look afresh at issues put aside for many years is evident when Pandey addressed Informist's question whether a proposal made in a SEBI consultation paper in May 2021 to replace the concept of promoters with that of shareholders in control will be revived.

 

SEBI had, in that paper, recognised the emerging reality that private equity, institutional investors, and even lenders who lend funds to promoters in exchange for a pledge on their shareholdings, may actually be controlling the management of such companies.  

 

Pandey said SEBI "...will look at it in a very constructive way...because there is a lot of merit in what is being said." "There could be what are the possible cons of it," Pandey said.

 

CONFLICT OF INTEREST CODE

SEBI set up the committee to review conflict of interest, disclosures, and related matters, in respect of its members and officials on Apr. 9 and the panel is currently interacting with various stakeholders, including SEBI officials, Pandey said. The committee has already met twice and started collating data on how other securities market regulators worldwide manage the conflict of interest matter. Pandey is hopeful the committee will submit its report within the three-month timeframe given to it.

 

According to Pandey, the code for SEBI board members was written in 2008 and had become outdated. Internal rules for other employees were framed even earlier, the SEBI chairman said. "There were certain disclosures which were being made (by them) internally. But in terms of public disclosure, there was nothing," he said. Both aspects are now being looked at by the independent committee.

 

"An internal exercise we could have done as well but I don't think that would have got so much of credibility," Pandey said. More importantly, according to Pandey, through the independent committee there will be meeting of minds from diverse fields which is a far better thing because it will help SEBI know how others see the regulator. It is important that diverse regulated entities talk with a free mind on this subject, Pandey said. "I think that independence would not have come had we done our exercise internally," he said.

 

"But the second thing is also the disclosures on recusals," Pandey said. The chairperson, board members, and senior officials may have joined SEBI after having worked in the market ecosystem, and can be asked to make comprehensive disclosures of their recent or past linkages and connections. But as a regulator, SEBI makes enquiries or investigates matters concerning a large number of companies and intermediaries. So, how does SEBI then deal with their files in order to recuse them from the relevant cases, and how it can be systematically done and standardised, are all difficult issues that form the terms of the reference for the independent committee, Pandey said.

 

The terms of reference give the committee "ample freedom...to decide how to frame the questions," he said. "So, this particular framework once it comes, it will create a right balance also, how much to disclose, what to disclose internally, which one to disclose externally, then how do you maintain the conflict of interest issue internally and also externally how much you have to do it," Pandey said.

 

It will also bring about clarity among SEBI board members and officials, according to the chairman. "You want also an effective regulator, not a timid regulator," Pandey said. Everyone also wants that SEBI should not be arbitrary in using its powers "but we should not be timid," he said.

 

F&O PHASE 2

The phase two of changes in derivatives rules to tame the runaway trading volume in options contracts on expiry day commenced this week. SEBI Monday took away the flexibility of stock exchanges to fix, and change whenever they wanted to, the expiry day for their weekly or monthly derivatives contracts. A stock exchange now has to choose between Tuesday and Thursday as the expiry day, and also has to ensure the monthly expiry can only be in the last week of the month. More is on the way in the next few weeks.

 

Pandey said SEBI continues to be very watchful of this market and how investors are faring in their trades, after two earlier years' reports by SEBI indicated a majority of investors lost money in F&O trading. The data for 2024-25 (Apr-Mar) is being compiled, Pandey said.

 

The trading volume has come down by over 40% since mid-November when the new measures kicked in but SEBI believes it should be compared to year ago and two years ago; on these comparisons, the volume is higher. But Pandey clarified SEBI has no particular level of trading volume in mind that will comfort it. The end objective is to see that market stability is not compromised, he said.

 

SEBI will soon issue a circular laying out further changes in the derivatives rules with the biggest one being the shift to a delta approach in calculating the open interest position in equity derivatives from a notional turnover based one. Pandey said the derivatives products are really for hedging, but if someone is using these to manipulate the market, then SEBI would be alert and would act swiftly. "We will not permit market manipulators" to operate in the market, Pandey said.

 

CONSENT ORDERS

To a question on lack of consistency by SEBI in the details provided in its settlement orders, which are known as consent orders in some international jurisdictions, Pandey said the settlement is neither an admission nor a denial of guilt.

 

The SEBI chairman dismissed philosophical doubts about whether the settlement, or consent, mechanism should be used as a tool as it allows violators to avoid the due process of law and is not seen by some as an adequate deterrent. It is an important principle in civil cases, Pandey said. 

 

When applied to the securities market it is like causing financial hurt to someone or a warning, he said. It is also "one way of moving forward without, you know, litigating endlessly," Pandey said. A case in point is that several orders passed by SEBI are appealed against and this creates a backlog at the Securities Appellate Tribunal.

 

When asked for an update on SEBI's show cause notices issued to Adani group entities, the chairperson said he will not comment on individual cases. The market regulator had issued show cause notice to six companies under Gautam Adani over a year ago for violation of related party transactions, non-compliance of norms related to listing, and auditor certificates' validity. This was the latest action from the regulator after a series of allegations against the conglomerate, which started with the US-based short-seller Hindenburg's claim in January 2023 that the group was engaged in stock market manipulation and fraud over the course of many years. The Adani group has denied such allegations and has called them baseless and malicious.

 

CORPORATE BONDS

The SEBI chairman is also keen to see robust retail participation in the bond market. "Unfortunately, it (secondary bond market) is dominated by institutions and the banks and others." But retail participants now have the option to come through online platforms and the electronic bidding platform where the price discovery is fair, Pandey said.

 

"So, the idea is that you have to create the liquidity, the depth and the secondary market in bonds and also allowing all kinds of players, including institutions and the retail investors to come in and create something which we have already done in case of equity market," Pandey said. However, trading in the secondary bond market is an issue which needs much more effort, he said.

 

"People don't understand the bonds the way they understand equity. If I want to buy a bond in the secondary market, I should know how do I price it...what is settlement amount." He also said existing terminologies in the over-the-counter bond market need to be simplified. 

 

To a question on whether SEBI can consider doing something similar to what the RBI did many years ago when they allowed primary dealers in the government securities market and which has helped that market, Pandey said "we are looking at different issues, how to move forward." 

 

Pandey pointed to the association formed by the online bond platform providers. The association is "bringing in a lot of ideas" on the table which SEBI is examining, he said. The SEBI and RBI have to work together to take it forward, according to Pandey.

 

SME LISTINGS

Replying to a question whether the SME boards of exchanges had been successful in enabling access to risk capital to a broader spectrum of companies, Pandey said he viewed these as successes and added there have been egregious instances where retail investors were "taken for a ride". "Sometimes in the market exuberance, people aren't really looking at what they are investing in," Pandey said.

 

The SEBI board had in December approved proposals to tighten norms for companies planning to list on the small and medium segment of stock exchanges. The changes included a new requirement for the company to have an operating profit of INR 10 million for any two of three previous financial years before its lists on the SME boards. 

 

To mitigate risks of misuse of issue proceeds, SEBI had also cut the proportion of initial public offer funds used for general corporate purposes to 10% from 25% of the amount raised, or INR 100 million, whichever is lower. The SEBI chairman is also conscious of the fact that in India, many small companies want to remain private, and not go public, and he said this explains the slow growth in the number of listing on the SME platform.

 

On the issue of listed companies' having a different interpretation of materiality under the disclosure norms, Pandey said SEBI has already issued several clarifications on the subject of materiality. In September, SEBI's board had set a threshold for disclosing fines by statutory and regulatory entities doing away with the earlier requirement of disclosing all penalties. SEBI had also harmonised the listing norms and issue of capital regulations with respect to thresholds for identification of material subsidiary, material litigation disclosures, and material agreements.

 

The SEBI chairman is not worried about any impact on its jurisdiction from the recent relaxations in listing rules on the two international exchanges at the International Financial Services Centre at Gujarat International Finance Tec-City. Early last year the government permitted direct listing of Indian companies on the two international exchanges. Also, domestic investors can now invest in issuances on these exchanges.

 

According to Pandey, investments by domestic investors in the IFSC exchanges are equivalent to overseas investments and so will be subject to limits set by the Reserve Bank of India under its liberalised remittance scheme. No further relaxation is being given to domestic investors on those international exchanges, the SEBI chairman said.  End

 

Edited by Vandana Hingorani

 

 

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