The recent controversy surrounding Madhabi Puri Buch, the chairperson of the Securities and Exchange Board of India (SEBI), has brought to the forefront a crucial issue that plagues India’s regulatory ecosystem: the absence of a comprehensive and enforceable code of conduct for chairpersons and members of regulatory bodies. Allegations against Buch, which include, among others, receiving rental income from a firm linked to a pharmaceutical company under SEBI investigation, have raised questions about conflicts of interest and the integrity of India’s capital market regulator.
While the Congress party has called for an independent probe, the broader issue at hand is the need to establish clear, transparent, and enforceable ethical guidelines for those who hold positions of power in regulatory bodies such as SEBI, the Reserve Bank of India (RBI), the Insurance Regulatory and Development Authority (IRDAI), the Competition Commission of India (CCI), the Pension Fund Regulatory and Development Authority (PFRDA) and others. These bodies hold the mandate to regulate vast sectors of the economy, ensuring their smooth functioning, transparency, and accountability. When their leadership is compromised, even by the appearance of impropriety, the consequences ripple across the economy, affecting investor confidence, market stability, and public trust in the regulatory framework.
Comprehensive code
Regulatory bodies in India wield immense influence over financial markets, competition regulation, corporate governance, and consumer protection. They are entrusted with safeguarding public interest by ensuring compliance with laws, maintaining market integrity, and upholding fair practices. However, the trust that the public, businesses, and the government place in these bodies rests heavily on the perception of their impartiality and independence. A formal and enforceable code of conduct for chairpersons and members of these bodies would serve as a critical tool in maintaining the integrity of these institutions.
As the current SEBI controversy illustrates, conflicts of interest — whether real or perceived — are among the most serious threats to regulatory integrity. Chairpersons and members of regulatory bodies are privy to confidential information and have significant influence over key decisions. A robust code of conduct must mandate full disclosure of financial interests, previous associations, and any relationships that may create a conflict. Furthermore, it should include mechanisms for recusal in cases where such conflicts exist. The mere act of transferring investments to a spouse, as alleged in Buch’s case, is insufficient to issue a clean chit. Financial transparency must be absolute.
Regulatory leaders often come from backgrounds in banking, finance, civil services or industry, where they may have accumulated wealth, shares, or property. This creates potential conflicts when they are tasked with regulating sectors in which they have financial stakes. A comprehensive code should set strict guidelines on financial conduct, including the mandatory divestment of holdings in regulated entities, restrictions on receiving income from entities under regulation, and even post-retirement cooling-off periods. Such measures would align India with global best practices, where regulators are required to sever financial ties with industries they oversee.
Regulatory capture
Regulatory capture occurs when those tasked with regulation act in the interest of the entities they are supposed to regulate rather than the public good. India’s regulatory bodies have often been criticised for their leniency towards big corporations and industries with substantial political influence. A well-defined code of conduct, backed by an independent oversight mechanism, would act as a safeguard against regulatory capture, ensuring that the regulators remain answerable to the public and not to vested interests.
While transparency and independence are crucial, accountability is equally important. Regulatory heads should be held to the highest standards of accountability, with clear provisions in the code of conduct for investigating and addressing misconduct or unethical behaviour.
This would require setting up independent ethics committees with the power to investigate allegations of misconduct, impose sanctions, or recommend dismissal where necessary. The current controversy surrounding SEBI’s leadership underscores the need for such a body to investigate conflicts of interest impartially and independently.
Ultimately, the integrity of regulatory bodies directly impacts public trust in the financial and economic system. India’s financial markets have grown significantly in recent years, with over 10 crore Indians now holding investments in various forms. These investors deserve a regulatory system that they can trust, free from any hint of bias or corruption.
A code of conduct would not only protect the public interest but also strengthen India’s financial markets by bolstering confidence in the regulatory framework.
In the absence of institutionalised mechanism for conflict disclosures by heads of regulatory bodies, past instances of ethical conduct by regulators, as highlighted by Congress spokesperson Pawan Khera, have been more a matter of personal choice rather than institutional mandate. For example, former SEBI chairpersons M Damodaran and CB Bhave went to great lengths to avoid even the appearance of impropriety. Damodaran sold his shares in State Bank of India upon taking over UTI, and Bhave recused himself from matters involving the National Securities Depository Ltd, where he had formerly been chairman. These examples demonstrate that ethical leadership is possible — but institutionalising it through a formal code of conduct would make it mandatory, rather than discretionary.
SEBI at least has a ‘Code on Conflict of Interests for Members of Board’ even though the disclosures thereunder are confidential, defeating the very purpose of having such Code in place in the first instance. Sectoral regulators such as PFRDA and IRDAI have not published any such Codes on their websites, leave aside making disclosures on conflicts public. Similarly, CCI — a market regulator with jurisdiction across all sectors of the economy and having vast control on M&As — is yet to publish a similar Code for its Chairperson and Members and make public the potential areas of conflicts.
The current allegations against SEBI’s chairperson have cast a shadow over the credibility of India’s market regulator and have raised broader questions about governance and ethics in regulatory bodies. To restore confidence, the government must act decisively by implementing a comprehensive code of conduct for all chairpersons and members of regulatory bodies and ensure they are prominently published on the websites of the regulatory bodies. This code should emphasise transparency, independence, financial probity, and accountability. Without such safeguards in place, the integrity of India’s regulatory framework will remain vulnerable, and the trust of the public, businesses, market participants and investors will be at risk.