Regulators & Conflicts of Interest: India’s Blind Spot https://www.youtube.com/watch?v=3y5UB6dZ4BA May 28, 2025
SEBI's new chairman, Tuhin Kanta Pandey, has openly acknowledged a serious lapse in transparency standards—an admission that starkly contrasts with past denials. In this powerful commentary, Sucheta Dalal breaks down the urgency of reforming SEBI’s outdated and voluntary conflict of interest code.
She argues that the High-Level Committee (HLC) must go beyond a cosmetic fix and set new benchmarks for all Indian regulators—from fixed tenures and cooling-off periods to blind trusts and broader definitions of conflicts.
With India allowing lateral entries into regulatory roles, the need for a legally binding code of ethics is more urgent than ever. Don’t miss this in-depth analysis of what went wrong—and what must happen next to restore credibility in India’s regulatory institutions.
Youtube transcript: (under edit) This is Sucheta Dalal.
This week I'm going to talk about SEBI's avoidance of conflict code and the high-level committee that has been set up to look at this code.
Why are we discussing it?
Because I think the high-level committee has a lot of potential and maybe it should do things differently.
In fact, let's start with this candid interview that Tuhin Kanta Pandey, the newly appointed chairman of the Securities and Exchange Board of India, gave to Indian Express last week.
He acknowledged a significant lapse in the regulator's transparency standards.
He also noted that there was virtually no public disclosure in the context of his predecessor's personal address and the existing disclosures, such as they were, failed to meet even minimal expectations.
Now, this is a surprise, isn't it?
His predecessor, highly controversial Madhabi Puri Buch, exited in March.
Until her exit, the finance ministry, with its thundering silence, seemed to be supporting what she did.
She herself, in stark contrast to what the present SEBI Chairman is saying, has put up a meticulous defense about what she did, her recusals, answers to every allegation about conflict of interest, especially in the context of the Adani group, rental incomes, ESOPs, and what have you.
She said she has adhered to all necessary disclosures and recusal protocols.
Now, Mr.
Pandey's remarks are extremely significant for two reasons.
One, what he said, that they did not even meet minimal standards.
And the second, that right in his first board meeting, he managed to get the SEBI board to initiate a comprehensive review of SEBI's conflict code by setting up a high-level committee.
Now, remember, this is a code that was concocted in 2008 and has remained unchanged for 17 years, 16 plus 2025.
Now, this can't be, right?
And the new chairman seems to be very clear about this.
In fact, speaking at a money control event, he even emphasized the necessity of regulatory bodies upholding the highest standards of governance and transparency.
His words were, maintaining trust and transparency is paramount to instill confidence in investors.
We've been saying this too.
Therefore, he says, we need to be more transparent on conflict of interest of the board itself.
SEBI's 2008 code, as I have written and said in two previous blogs, is applicable only to the chairperson and the three whole-time members.
Worse, it is weak, legally dodgy and voluntary.
It is weaker than the code that applies to all SEBI officials until the level of ED.
So three WTMs and the chairperson have a very weak code where they're allowed to deal in shares, their disclosures are minimal.
And these four at the top have kept this, different four of course, have kept it unchanged for 16 years under four different chairpersons and a whole bunch of WTMs, even while they were busy framing copious disclosure rules for every market institution and intermediary.
Had any previous chairman since 2008 felt the need to update this code and said, hello, we can't have a weaker code than others, it would have saved SEBI a lot of embarrassment that it faced under Ms.
Buch.
In fact, SEBI has still to clarify, despite lots of questions in RTI, whether it's Top Bruss for 16 years, mind you, has adhered to a weak and voluntary 2008 code or to far more stringent government service rules that the government's top regulatory appointments dictate.
These are rules that should have been followed.
SEDI's code is in addition to those rules and we don't even know what really happened, what was followed and what was done.
So now we come to the high-level committee.
It's been set up, it's held hearings and it's been entrusted with a broad and urgent mandate.
Foremost among these is to determine whether SEBI requires a dedicated and binding code of conduct to prevent conflict of interest.
Why is this decision important?
Because there are government service rules under which top regulators are appointed and the fact that other financial regulators have not felt the need to have a separate code.
Now, in my view, there is no room for ambiguity.
There should be a clear, legally enforceable code of ethics.
This is imperative, not just for SEBI, which is India's first independent regulator, and so the correct starting point, but for all financial regulators that came after SEBI, insurance, pension, and what have you, and sectoral regulators, which is gas, telecom, electricity, real estate, and why not even Competition Commission of India.
You need a code that goes across.
So while there's a high-level committee for SEBI, a sensible finance ministry would extend it to everyone because the risks posed by access to unpublished price-sensitive information, which is what leads to insider trading, is there in all these domains.
Are they less susceptible?
No.
If the government intends to have a revolving door where they bring in people from the private sector, where very stringent government rules do not apply to them, then you need a code.
You cannot afford to wait for the next scandal.
Robust and mandatory ethical framework has to precede a controversy, not follow it.
So the high-level committee is there.
It is an opportunity to craft a model code of ethics, which can be adopted by SEBI, or it can function under a standalone framework under a dedicated separate legislation.
This would be like the Ethics in Government Act, which the United States of America has.
In fact, the U.S.
Act has sets out very clear boundaries regarding permissible investments, income sources for those in fiduciary roles.
It mandates the divestment or transfer of certain assets into blind trusts to eliminate conflict of interest, and it has a process of investigation when all this fails or where there are complaints.
India needs similar clarity.
In fact, the dubious clause in SEBI's 2008 code, which permits senior officials to deal in shares, has to go.
Substantial equity investment should either be frozen or liquidated and has to be put in blind trust.
Employee stock option plans, ESOPS, which was another controversial point with Madhabi Puri Buch, must be in cash prior to assuming a regulatory post.
And violations of the code should automatically trigger an investigation.
This institutional framework for such an investigation has to be predefined by the high-level committee.
It should have clearly defined penalties, including dismissal wherever warranted.
Crucially, the code has to expand the financial interest covered.
It cannot be just the spouse and dependent children, which are usually minors.
It cannot be as weak as that.
It should cover investments held through trusts, discretionary family offices or affiliated entities so that there are no loopholes in disclosure and enforcement.
This would then be consistent with Rule 3.1 of semi-service rules, which already stipulate that the chairperson must be someone who does not and will not hold any interest likely to affect prejudicially his functions, his or her.
It's time to give these principles some teeth.
The HLC must establish rigorous protocols for periodic disclosure of assets, annual, quarterly, half-yearly, whatever, mandatory recusal, how it will happen in the event of conflict, transparent process for investigating complaints, confidential treatment of whistleblower disclosures, and consequences for violation, which should be proportionate to the authority as well as fiduciary responsibility vested in the particular regulatory position.
Different probably for the chairperson, different for the WTM who may have a narrower focus.
And all these have to be clearly delineated in the code itself.
An independent and binding code of ethics enacted through a dedicated legislation will create an institutional framework that is necessary to address future controversies with credibility and consistency.
And who says that this will happen only in SEBI?
You can have your next controversy erupting with the electricity regulator or the gas regulator.
So let's have a separate legislation and a framework that goes across.
And it would prevent a repeat of this embarrassing precedent set by SEBI, where SEBI itself, along with maybe a team of people close to the chairperson, issued an anonymous press release to exonerate its own chairperson.
Nothing more ridiculous than that, zero transparency, and it cannot be repeated.
There are several additional concerns that must be tackled by the HLC in line with best practices around the world.
For instance, fixed term.
Every SEBI chairperson for the last two decades has tried to lobby for an extension.
So holding a powerful regulatory office has a service obligation, a fiduciary duty, and this requires financial sacrifice.
Let's limit this financial sacrifice to a fixed term.
It should not be renewable under any circumstances.
When there's a fixed tenure, it also ensures that the regulator acts independently and boldly and has no temptation or lure of a post-retirement posting or term extension.
Here, I mean, a post-retirement SEBI itself is a post-retirement posting for most people who have come into the regulatory body over the last 30 years.
But many of them are lobbying for something even further, usually very lucrative directorships.
But I'm coming to that.
In India, it's an open secret that appointments have industry lobbies who use their influence with governments and politicians.
And this only happens when there is a quit pro.
Fixed tenure removes at least one end of it.
You've got your position, God knows how, there is an appointments committee.
We have seen over the years that the names suggested by them don't necessarily get appointed.
Sometimes it's others.
That is no transparency.
But at least at the end of it, after fixed tenure, you're not tempted to use influence again.
Then a cooling off period.
The conflict court must have a statutory cooling off period of one to two years before senior regulators can accept positions with regulated entities or take up lucrative independent directorships and chairmanships.
Especially when these regulated entities have entered into a settlement with the regulator, it should require prior permission and disclosure, which is transparent.
Now, let's look at related persons.
Like I said, it can't be just family and dependent children.
It has to expand at least online with what SEBI requires from independent directors of listed companies or what all of us are required to disclose under tax laws, especially for businesses.
SEBI's failure to update its own disclosure norms for 16 years while making rules stricter and stricter rules for other market participants is a glaring omission.
No one's questioned them.
In fact, every SEBI chairperson for this period from 2008 onwards bears responsibility for perpetuating what I would call double standards.
Now let's look at the recusal policy.
Clear protocols are essential when there is a conflict, how the declaration happens, the fact that they abstain from related discussions and decisions has to be recorded in some fashion and minutes by the board of directors.
The nature of conflict and the reason also must be mentioned.
And at least a summary of these cases should be available in SEBI's annual report and published on its website.
This is critical because SEBI is a chairperson-led organization.
The chairperson decides on lucrative postings, foreign junkets and what have you.
So has tremendous influence on staff and promotions.
So weak safeguards will not work.
It breeds internal dissent, politics and a toxic culture, which was happening because you saw that SEBI for the first time had officials coming down and protest.
And this undermines SEBI's credibility and effectiveness.
So the high-level committee does its job well and its recommendations are up to the mark.
It could become a turning point in India's regulatory governance.
In fact, I am saying the high-level committee appointed by SEBI is great.
Let's elevate it further.
Let's make these recommendations applicable to all regulators.
Let's hope that it suggests a separate legislation under which all regulators will follow a code of ethics that is common to everybody.
This is an opportunity to set a precedent, not just for SEBI, but for all regulators.
A robust and legally binding code that addresses conflict of interest, pooling periods, recusal protocols, asset disclosure would anchor regulatory credibility in a time of eroding public trust.
The alternative is terrible.
Institutional drift, maybe not at SEBI, maybe at another regulatory body, and embarrassment.
And the embarrassment is always to the government and power because clean chips issued in anonymity, if they happen somewhere else, the buck stops with the government.
And India's market architecture definitely deserves better.
India's regulatory architecture deserves better.
We cannot boast about our GDP if we don't have proper rules in place on par with the best in the world.
So this HLC must deliver.
If you agree, please share this video and think about it.
Unless we put pressure on the government to make change happen, it doesn't.