Company Outsider: Why Sebi took 33 years to demand accountability from its own leaders

For 33 years, the Securities and Exchange Board of India (Sebi) operated without a legally enforceable ethics code for its own people, even as it wielded the power to penalize market participants for far lesser infractions. So the question isn't whether its high-level committee's latest plan to replace the existing toothless voluntary code with a transparent, legally-binding framework for its senior leaders, is necessary. It's why that took so long.

The answer likely lies in an uncomfortable truth about India's regulatory culture: senior positions are often treated as earned privileges rather than fiduciary responsibilities demanding accountability. The delay in reform wasn't mere bureaucratic inertia. It reflects a deeper institutional reluctance to impose on regulators the same stringent standards they enforce on others; a reluctance that became unsustainable only when controversies threatened the regulator's credibility at a moment when it could least afford it.

The credibility crisis couldn't have come at a worse time. India added over 60 million new retail investors post-pandemic, fundamentally changing the profile of investors who depend on Sebi for maintaining a level-playing field in the markets. These aren't sophisticated institutional players with legal teams and risk management frameworks who can absorb governance scandals as part of doing business. When allegations about a regulator's conflicts of interest trend on social media, and are debated by newly-minted investors, the stakes become existential in ways they simply weren't earlier. Increased retail participation in the markets has made regulatory credibility a mass concern, not an elite one.

The recent controversies perfectly illustrate the systemic failure. The Madhabi Puri Buch episode of 2024, involving allegations of receiving retirement benefits from an ICICI Bank-related entity and questions about her husband's income from a firm related to Mahindra & Mahindra while Sebi handled related cases, was what might have provided the final nudge for change. The allegations, regardless of their merit, exposed a fundamental flaw: Sebi lacked mandatory public disclosure requirements for such financial relationships, allowing the appearance of impropriety to fester.

Similarly, the 2008 controversy involving C.B. Bhave's recusal from matters related to National Securities Depository Limited (NSDL), which he previously headed, demonstrated the inadequacy of ad-hoc, internal measures. While Bhave stepped aside, the resulting legal challenges and allegations of undue favour highlighted the crying need for a formal, structural solution: a system that prevents the appearance of a conflict, not just the fact of it.

The present set of proposals - and we have to be mindful that they are just that at this point - acknowledges that existing codes were inadequate, marred by inconsistent definitions of key terms like 'family' and 'conflict of interest,' and critically lacking in legal muscle to ensure compliance.

If implemented, the proposed reforms will bring Sebi in line with global best practices. Regulators like the US Securities and Exchange Commission (SEC) and the UK's Financial Conduct Authority (FCA) have had robust, legally-mandated ethics requirements for decades. When Henry Paulson transitioned from Goldman Sachs to head the US Treasury in 2006, he had to divest investments worth over $400 million. That wasn't a mere bureaucratic requirement. It reflected a fundamentally different philosophy; that public service at the highest levels demands genuine sacrifice of wealth-building opportunities. This principle, that senior officials must demonstrably shed conflicts rather than merely manage them, underpins regulatory credibility.

Does India's regulatory culture accept this bargain? The question matters because the proposed framework demands exactly such sacrifice. The new three-pronged approach, built around the proposed Office of Ethics and Compliance (OEC), mandates radical transparency. The chairman, whole-time members, and officials down to the chief general manager level will face mandatory public declarations of assets and liabilities. Top officials will be treated as "insiders" under Sebi's trading regulations, forcing them to liquidate or freeze existing investments upon joining. In addition there will be a two-year cooling-off period when former senior officials will be barred from immediately appearing before or against the regulator.

Going forward, the process requires the Sebi Board to approve the recommendations, followed by regulatory amendments. It’s urgent that it happens quickly. These reforms will not prevent every controversy. But they will create the institutional infrastructure that the regulator needs to build the unimpeachable credibility its position demands.