The unfolding saga of the Securities and Exchange Board of India (SEBI) has gripped the attention of the business and financial world. Sherlock Holmes said, “If you remove superstition, melodrama and chaos, all you’re left with is cold facts.” The superstition in the saga is that a government always speaks and acts in the interest of the people. The melodrama is that the story pits Big Business against the Small Investor and at the end of the day we must avoid blood and gore. The chaos is because too many people speak in too many voices and the result is only noise.
If you cut out the superstition, melodrama and the chaos, you will find the truth. The central question was, what was the source of investment in a business group? The group denied any wrongdoing and claimed that the money was legitimate. The doubters alleged that the money was through over-invoicing and round-tripping, and was illegitimate. SEBI investigated the matter and reported that it had found,prima facie, nothing wrong, but the doubters were not satisfied. Ultimately, the Supreme Court asked a five-member Committee under Justice Sapre to investigate and report.
What committee found
What the Justice Sapre Committee found—and could not find—are important. The Committee found that there were 13 overseas investors including 12 foreign portfolio investors (FPI). The ‘beneficial owner’ of each FPI had been disclosed but theultimatebeneficial owner—the last natural person in the chain—had not been disclosed. Why? Because the requirement to disclose the last natural person had beendone away with in 2018!Nevertheless, SEBI claimed that it had investigatedthe ownership of the 13 overseas entities since October 2020 buthad drawn a blank. The Committee’s comment was scathing:
“Without such information SEBI is unable to satisfy itself that its suspicion that has been aroused can be put to rest. The securities market regulator suspects wrongdoing but also finds compliance with various stipulations in attendant regulations. Therefore, the record reveals a chicken-and-egg situation.”
On the connected question if the investors or their beneficial owners were ‘related parties’ to the investee companies, the Committee found that the terms ‘related party’ and ‘related party transaction’ had been amended substantially in November 2021 but withprospective effect, some from April 1, 2022 and some from April 1, 2023! The Committee’s comment on this aspect was equally scathing:
“Having adopted the path of making explicit stipulations prospectively, the feasibility of testing the principles underlying the regulations governing related party transactions has been eroded.”
The final conclusion of the Committee was that “…it appears that the legislative policy of SEBI on the ownership structure of FPIs has moved in one direction while the enforcement by SEBI is moving in the opposite direction.”
Sebi carries on
Nevertheless, SEBI continued with its investigations into 24 specific cases. When the Committee’s report was submitted to the Supreme Court, the Court heard arguments and by an order dated January 3, 2024 upheld SEBI’s actions. The Court also directed SEBI to complete its investigations inthree months. Seven months have elapsed.
Conflict of interest
Everyone thought that the allegations of the short-seller, Hindenburg Research, had been given a quiet burial in January 2024, but the short-seller hit the headlines again in August 2024 when it made allegations against Ms Madhabi Puri Buch, Chairperson of SEBI, and her husband, Mr Dhaval Buch. Ms Buch was appointed whole time member of SEBI in April 2017. After she completed her tenure, and a gap, she was appointed Chairperson on March 1, 2022. When the crucial decisions were taken in 2018 and 2021-24, Ms Buch was in a decision making position in SEBI.
Allegations of conflict of interest have been made against Ms Buch. It appears that she and her husband had economic interests in entities that were investigated by SEBI and reviewed by the Justice Sapre Committee. Ms Buch admitted her investments but offered explanations: they were made when she and her husband were private citizens; that they had redeemed the investments upon her appointment in SEBI; and that the companies concerned had become dormant soon after.
The issue isnotwhether there was wrongdoing or actual conflict of interest on the part of Ms Buch. The issue isnotwhether the government is shielding Ms Buch in order to shield the business group. Rather, the issue is a simple and straightforward one: Did Ms Buchdiscloseher past connections and actions—and thepotentialconflict of interest—to SEBI, to the government, to the Justice Sapre Committee, and to the Supreme Court?Apparently not. Nor did Ms Buch recuse herself from the investigations.
Assuming all the facts in Ms Buch’s favour, at the least she committed a grave and culpable error. She ought to have made a disclosure and recused herself from the case. Her participation has tainted the investigations. She must resign and the allegations investigatedde novo.
