All above board: Sebi's move on disclosures a step in the right direction

Sebi board has decided to constitute a high-level panel, which will comprehensively review "the provisions relating to conflict of interest, disclosures pertaining to property, investments, etc

The first board meeting of the Securities and Exchange Board of India (Sebi) under new Chairman Tuhin Kanta Pandey on Monday made the formal move to review the provisions related to “conflict of interest” of the members and officials of the board.  This is important at least on two counts. First, while emphasising the need for trust and transparency among stakeholders, Mr Pandey in his public remarks recently had said they extended to Sebi as well. He had further noted Sebi needed to be more transparent and it would come up with a plan. Interestingly, this portion was not part of the speech uploaded on the regulator’s website. However, now that the Sebi board has decided in this context, it is clear that the institution is determined to move forward in this direction. 

Second, the move suggests the regulator is willing to adjust to the evolving conditions. Notably, former Sebi chairperson Madhabi Puri Buch was accused of conflict of interest by United States-based short-seller Hindenburg Research, which has since shut down, in the context of an ongoing investigation of the activities of a large business conglomerate. Both Ms Buch and Sebi had then issued statements. The regulator had emphasised that it had a robust disclosure mechanism. However, it was argued by many, including this newspaper, that the mechanism needed to be strengthened. Any allegation of conflict of interest against key persons in the securities-market regulator can undermine faith in the market, and that can have longer-term consequences. 

It is in this context that the Sebi board has decided to constitute a high-level committee, which will comprehensively review “the provisions relating to conflict of interest, disclosures pertaining to property, investments, liabilities, etc. and related matters in respect of Members and Officials of the Board”.  The committee will consist of experts and other eminent persons, and will be expected to submit its report within three months of its formation. The report, hopefully, will be released in the public domain to enable debate. While it is important to see what the committee recommends, the process will gain strength if the interests of key officials are disclosed to the public. A similar approach can be followed by other financial regulators. This would eliminate the possibility of raising any doubt over the interests of key officials in the regulatory bodies and increase trust in financial markets. 

Aside from the conflict-of-interest issue, which was the biggest highlight of the meeting, the Sebi board took several important decisions worth mentioning. For instance, if a foreign portfolio investor (FPI) holds equity assets of ₹50,000 crore it has to disclose its granular ownership and economic interest details. The earlier threshold was ₹25,000 crore. While increasing the threshold — which means lower disclosure requirements for a larger number of FPIs — is expected to boost capital flows, it can be argued that the adjustment could have been made more gradually. Such changes should not be driven by short-term market needs. Nevertheless, it has done well not to relax the disclosure requirements for FPIs with concentrated holding in a single corporate group. Besides, the board tweaked the regulation for category II alternative investment funds, which should help them meet regulatory requirements more easily. Changes in the provisions of appointments to market infrastructure institutions should help strengthen governance.