Syllabus: GS3/Economy
Context
- Recently, the High-Level Committee (HLC) of Securities and Exchange Board of India’s (SEBI) has proposed a comprehensive set of reforms aimed at reinforcing transparency, ethical governance, and investor confidence.
| High-Level Committee (HLC): Background and Purpose – It was constituted in March 2025 against the backdrop of allegations made by Hindenburg Research against former SEBI chairperson, relating to potential conflicts of interest involving offshore funds. – It was tasked with assessing SEBI’s current framework on conflicts of interest and recommending improvements to ensure higher standards of accountability and integrity within the regulator. – It is chaired by Pratyush Sinha, former Chief Vigilance Commissioner (CVC). What Is the Conflict of Interest Framework? – It governs how officials at the SEBI manage personal and professional interests that could compromise their regulatory duties. – It ensures that decisions are made impartially, without undue influence from financial or non-financial interests. |
Key Recommendations of Committee
- Public Disclosure of Assets and Liabilities: The Committee recommended a multi-tier disclosure regime, designed to enhance transparency and public trust in SEBI’s top decision-makers, under which:
- The Chairman, Whole-Time Members (WTMs), and SEBI employees at the level of Chief General Manager (CGM) and above will be required to publicly disclose their assets and liabilities.
- Applicants for senior positions must declare actual, potential, and perceived conflicts of interest, both financial and non-financial.
- Uniform Investment Restrictions: The committee proposed that investment and trading restrictions under the SEBI (Employees’ Service) Regulations, 2001 should apply uniformly to the Chairman and WTMs.
- Key recommendations include:
- Inclusion of these senior officials under the definition of ‘insider’ in the SEBI (Prohibition of Insider Trading) Regulations, 2015.
- Mandatory choices upon assuming office: liquidate, freeze, or sell investments, with prior approval.
- Part-time members (PTMs) will remain exempt but must still make appropriate disclosures and refrain from trading on unpublished price-sensitive information.
- Key recommendations include:
- Managing Conflicts of Interest: Redefining “Family”: The committee proposed expanding the definition of ‘family’ in SEBI’s Code of Conduct to align with the Employees’ Service Regulations (ESR) and global best practices.
- The new definition includes:
- Spouses, children, and dependent relatives.
- Any person for whom the member acts as a legal guardian.
- Individuals related by blood or marriage who are substantially dependent on the employee.
- The new definition includes:
- Strengthening the Recusal and Whistleblower Systems:
- Robust Recusal Framework: A formalized recusal process for the Chairman, WTMs, PTMs, and senior SEBI employees.
- Annual publication of recusals in SEBI’s Annual Report, a practice not currently followed.
- Secure Whistleblower Mechanism: Establishing a confidential, anonymous whistleblower system allows employees, board members, and even external stakeholders to report conflicts of interest or ethical breaches.
- Strong safeguards will protect whistleblowers from retaliation.
- Robust Recusal Framework: A formalized recusal process for the Chairman, WTMs, PTMs, and senior SEBI employees.
- Post-Retirement Restrictions: The Committee suggested a two-year cooling-off period for all former SEBI members, employees, consultants, and advisors.
- They would be barred from appearing before or against SEBI in any recognition, adjudication, or settlement matters during this period.
- Ethical Conduct and Governance Infrastructure: The committee emphasized building a culture of ethics through institutional mechanisms:
- Prohibition on accepting gifts, directly or indirectly, from entities with current or potential official dealings.
- Creation of an Office of Ethics and Compliance (OEC) and an Oversight Committee on Ethics and Compliance (OCEC) to oversee adherence to ethical standards.
- Implementation of an AI-driven monitoring system to detect, prevent, and manage conflicts of interest using data analytics and predictive algorithms.
Why Do Recommendations Matters?
- Restoring Investor Confidence: Retail investors need assurance that market regulation is fair and impartial, with over 170 million demat accounts across India.
- Preventing Regulatory Capture: SEBI can reduce the risk of officials favoring entities they have ties to, by enforcing disclosures.
- Institutional Credibility: Amid internal dissent and allegations of toxic work culture, these reforms signal SEBI’s commitment to ethical governance.
- Aligning With Global Standards: Similar frameworks exist in regulators like the US SEC and UK’s FCA, where asset disclosures and conflict audits are routine.
| Securities and Exchange Board of India (SEBI) – It was constituted as a non-statutory body in 1988 through a resolution of the Government of India and was established as a statutory body under the provisions of the Securities and Exchange Board of India Act, 1992. – Objectives: 1. Investor Protection: Safeguarding the interests of investors in securities. 2. Market Development: Promoting the development of a robust and efficient securities market. 3. Market Regulation: Regulating the business of stock exchanges, intermediaries, and other market participants. |
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