Transparency on trial: The case against Madhabi Puri Buch

A series of allegations by the Congress party against Madhabi Puri Buch, chairperson of the Securities & Exchange Board of India (SEBI), sent shock waves through the financial sector (on 5 August), casting a further shadow over the integrity of the market regulator.

The accusations were so startling that even seasoned market experts were initially sceptical, with some speculating that the Congress might have fallen prey to deep fakes. Yet, as the dust settled, ICICI Bank’s official response to the stock exchanges has only deepened the intrigue, raising crucial questions about the conflict of interest and absence of adequate disclosure norms when private sector individuals are appointed to top government positions.

Subhash Chandra Goel, founder of the Zee Group — himself embroiled in a long-standing investigation by SEBI — added fuel to the fire by holding a separate press conference to level some serious charges against the chairperson. But the spotlight remains firmly on the Congress, since it has followed up its original charges with more questions about ICICI Bank’s employee stock options plan (ESOP).

The initial allegations

Congress spokesperson Pawan Khera, in a press conference, accused Ms Buch of earning a staggering Rs 16.8 crore (approximately $2.1 million) from the ICICI group, through a combination of salary, proceeds of ESOPs and tax benefits. This figure dwarfs her earnings as head of SEBI by a factor of five. Ms Buch quit ICICI in 2013, having headed ICICI Securities, its brokerage firm, whose planned merger with ICICI Bank now is also mired in controversy.

[In the first week of September], ICICI Bank informed stock exchanges that all the money paid was due to retirement benefits accrued to Ms Buch after she left the bank in 2013. However, instead of quelling concerns, it has triggered new concerns about conflict of interest and the absence of disclosure and adequate oversight over those who head regulatory bodies.

On 3 September, the Congress raised new questions about ICICI Bank’s statement, saying ICICI Bank’s ESOP is only available on the US Securities Exchange Commission (SEC) website and not in India. That policy says an employee can exercise ESOPs within a maximum of three months after voluntary retirement. This seems contrary to ICICI Bank’s disclosure to stock exchanges that an employee can exercise ESOPs for up to 10 years after leaving the company.

However, another clause in the policy says that commencing the date of vesting, the period of exercising ESOPs will expire on the completion of a period not exceeding 10 years, ‘as may be determined by the Remunerations and Nominations Committee for each grant’.

This seems in line with Congress’s point that Ms Buch was singled out for special benefits. The Congress has also questioned how retirement benefits (they refer to it as pension/ salary) can be significantly higher than the last drawn salary of an individual. Since the Congress has not put out documents and SEBI has remained silent, it is still unclear if the figures in the Congress press release include ESOPs that may have been encashed by Ms Buch.

Disclosure norms: a question of transparency

The crux of the issue is disclosure rules governing the seniormost officials at regulatory bodies, given their access to unpublished price-sensitive information (UPSI). Their orders and decisions can dramatically impact stock prices, raising the stakes for stringent disclosure and compliance norms. A negative order against a listed company could lead to a fall in its share prices and could also cause a spike in share prices of competitors. So a public disclosure of personal interest and holdings seems a fair ask.

I emailed SEBI’s human resources chief to ask if UPSI and disclosure rules apply to the chairperson. Whether disclosure of the encashment of ESOPs are made by the chairperson every year and are there any restrictions on when the SEBI chair and whole-time members (WTMs) can encash ESOPs and investments in the context of the timing of significant orders and decisions. I have not received any response from SEBI.

In the seven years since Ms Buch assumed her role at SEBI, the regulator has tightened disclosure norms across corporate India, often under Listing Obligations and Disclosure Regulations (LODR) and insider trading rules. However, the lack of disclosure regarding her earnings/encashment of ESOPs from her previous employer raises uncomfortable questions.

Can an individual leading a regulatory organisation retain claims on ESOPs for a decade after leaving an organisation? More importantly, why does SEBI, an institution with over three decades of experience, not have robust mechanisms in place to address these potential conflicts?

Global standards: a stark contrast

Internationally, the standards for managing conflicts of interest among regulatory heads are stringent. The US has general rules of conduct for government officials in public service, which in a nutshell say, ‘You shall not hold financial interests that conflict with the conscientious performance of duty.’

Heads of regulatory bodies in most developed countries are, typically, required to divest direct holdings in entities that could pose conflict of interest, including sector-specific mutual funds. Assets that cannot be easily divested have to be placed in a blind trust that is independently managed.

The chairperson of the US SEC is subject to even stricter rules regarding conflicts of interest, investments and financial disclosures, owing to the power and influence of the job. In many cases, these financial disclosures are made public to ensure transparency and allow external parties to monitor potential conflicts of interest.

A more concrete example is that of Hank Paulson who transitioned from Goldman Sachs to head the US treasury. He was required to sell his investments valued at $700 million, with the only concession being deferred capital gains, if reinvested in government securities or mutual funds within 60 days.

In contrast, India’s regulations are ambiguous. The Central Vigilance Commission (CVC) manual, last updated in 2021, offers little more than vague guidance, cautioning against ‘frequent speculation’ in stocks and investments likely to ‘embarrass or influence’ the official’s duties.

It is hard to believe that SEBI has no rules in place for those at the top or that the SEBI chairperson did not realise during her seven-year stint that disclosure of salary/encashment of ESOPs were crucial in her highly sensitive role as SEBI chief.

The elephant in the room: codifying rules for conflict of interest

The broader issue here is the lack of codified rules for conflict of interest within SEBI — a deliberate strategy, perhaps, given that controversies involving trading and investments by senior SEBI officials date back to the 1990s.

SEBI’s rules on transaction in shares require officials to disclose their shareholding and that of their families within 15 days of assuming office and at the end of each financial year. Significant transactions must also be disclosed within 15 days and whole-time members are not allowed to trade on the basis of unpublished price-sensitive information.

But, if disclosures remain confidential, who monitors for potential conflicts? Is it likely that an internal vigilance official or HR department holds a chairperson or a whole-time member accountable? The Hindenburg Research allegations have exposed how we also have no information about her recusals in conflict-of-interest situations.

The charges levelled by multiple sources — Hindenburg, Subhash Goel, the Congress — and the ensuing debate underscore the need for SEBI to re-examine its internal policies, ensuring they meet the rigorous standards expected of a modern, transparent regulatory body. Only then can it maintain the public trust that is essential to its role as the guardian of India’s financial markets.

Sucheta Dalal is a renowned business journalist. She is managing editor of moneylife.in, where this piece was first published