SEBI | Shield against mudslinging, while performing self-cleansing

A pall of allegations hangs over the chairperson of India’s capital markets regulator, the Securities and Exchange Board of India (SEBI).

The facts of the matter must be ascertained to clear the air. The question is how to do it, and whether SEBI Chairperson Madhabi Puri Buch should step aside while the investigation is carried out.

Ideally, she should be given a chance to make her case as to why and how the allegations are baseless to a committee of Parliament, preferably to the Standing Committee on Finance, before which the markets regulator should regularly testify as a matter of course.

And, given the evidence available as of now, there is no reason for Buch to step down while the investigation is carried out.

Brazening it out

The regulator should be blameless and appear to be blameless. Brazening out the allegations is a possibility, but that would not serve the purpose of retaining the confidence of market participants, whether investors or regulated entities.

The government is inclined to this course of action, and its political supporters are out campaigning that the allegations against the SEBI Chairperson are a conspiracy against India.

The Opposition has threatened to take to the streets, seeking a Joint Parliamentary Committee (JPC) to investigate the charges raised by Hindenburg Research, a US-based entity, whose business model is to come out with negative reports on companies, after having taken short positions on their shares, and to book profits when the reports cause the share price to fall.

Business model, not conspiracy

There is no reason to dub Hindenburg a conspirator. It has a valid business model.

In an earlier exploit, it had taken down an electric truck maker, Nikola, which had been riding high on the stock market, shining in the afterglow of Tesla’s success.

Hindenburg exposed a video of a Nikola truck running quietly and at speed along a scenic route as one of the trucks running downhill, powered by acceleration due to gravity rather than by any fancy electric-engine-battery combination that Nikola had developed.

Such exposure, puncturing of hype, and the resultant drop in the price of the company’s shares did a public service, and also made money for Hindenburg.

Thorough investigation

Hindenburg’s accusations against the Adani Group, of manipulating stock prices through promoter holdings in offshore entities, have been investigated by Indian agencies. Out of 24 investigations, 23 have been completed, and the final one is expected to be completed in a month’s time.

The investigations are under the supervision of SEBI, but are carried out by professionals, and the Supreme Court had appointed an expert committee to oversee the investigations.

It is not reasonable to believe that all the professionals and experts involved can be suborned by Buch. The investigations have not validated the charges against Adani.

Adani has, at the meantime, been running and expanding its businesses, racing to set up the world’s largest hybrid – wind and solar – renewable energy project totalling a capacity of 30 GW, a part of which has already been commissioned, and feeds power into the grid.

3 main allegations

SEBI had issued a show-cause notice against Hindenburg. Hindenburg has retaliated with allegations against the SEBI Chairperson. There are three main allegations.

One is that Madhabi Buch and her husband Dhaval Buch are investors in a fund that Hindenburg says has Vinod Adani as an investor as well.

The Buchs say they made the investment in 2015, almost two years before Madhabi Buch joined SEBI, when they were both working in Singapore, and that the reason why they chose this particular fund was that its chief investment officer was Dhaval Buch’s friend from childhood, one Anil Ahuja, who had worked with Citibank, JP Morgan, and 3i, a private equity firm, and was thus a qualified investment professional.

Prior to Madhabi Buch joining SEBI as a Member, she transferred her investments in the fund to her husband, and in 2018, when their friend left as CIO, they redemmed their holdings.

At one level, this charge is absurd: If Raju is an investor in a mutual fund in which Adani also invests, does that make Raju responsible for anything that Adani does? At another level, if the fund in question, in which the Buch couple invested, had few investors other than themselves and the Adanis, and the bulk of the investment of the fund is in Adani companies, the picture would be different. As of now, there is no indication of such an incriminating circumstance.

Growth of REITs

The second allegation is that while Dhaval Buch served as an advisor to Blackstone, a player in Real Estate Investment Trusts (REIR]Ts), SEBI made policy that facilitated the growth of REITs.

Now, REITs mobilise money from assorted sources, including retail investors, and help build offices, commercial complexes and rental housing. This is all real estate that India is desperately short of. SEBI would be remiss, were it not to create regulation that helps REITs grow.

The real question is not whether SEBI should have let REITs grow when the SEBI Chairperson’s spouse was an advisor to a REIT player, but whether Dhaval Buch should have taken up a role associated with a REIT player, at a time when his spouse regulated REITs, among other things.

SEBI's service rules say employees should not use their influence to get jobs for relatives and must declare their close relatives’ employment details to a competent authority designated by SEBI. There is no way Madhabi Buch would not have disclosed Dhaval Buch’s employment to SEBI.

Conflict of interest

The third allegation has more meat. It says that Buch runs a consultancy. This is potentially a source of conflict of interest.

If the consultancy offered is to major entities regulated by SEBI, and generates substantial income, that would be a problem. This needs to be clarified.

Should Buch step aside pending investigation? If she is blameless, that would be harsh.

But the issue at stake is not so much Bush’s personal misery, as continuity and stability of the regulatory process in India.

If regulation can be disturbed merely by raising allegations against the integrity of a regulator, and having the regulator suspended, pending investigations, India’s regulatory regime would be rendered fragile, vulnerable to engineered discrediting of the regulator.

Potential manipulation

The Opposition should bear in mind that while their demand for clearing the air on allegations against Buch is entirely justified, the manner in which this is carried out should not lend itself to potential manipulation of the regulatory system by any vested interest.

Rather than call for a specially set up JPC, the Opposition should demand that Buch be asked to testify before the Standing Committee on Finance, (yet to be formed in Parliament's current term) and that this be instituted as a regular practice. All regulators should testify before the relevant standing committee of Parliament once a quarter.

A regulator should be autonomous from the executive. To expect the Finance Ministry to hold SEBI to account would violate this principle.

Judiciary's role

The judiciary’s job is to determine the legality of regulatory conduct if it is challenged by anyone. It falls, therefore, to the legislature, through its committees, to hold regulators to account.

If even this demand is turned down, it would be fair to approach the Supreme Court to seek a court-monitored inquiry.

The Opposition would do well to realise the stakes involved in the credibility and continuity of the stock market regulator, at a time of unprecedented retail participation in the stock market.

Its demands should be seen to be constructive, rather than merely to target the government.