Hindenburg Saga: What Is Conflict Of Interest? What Is Sebi's Code For Its Board Members Including Its Chief --Explained

New Delhi: US-based short seller Hindenburg on Sunday tweeted that the fact that Madhabi Buch remained personally invested in the same funds by the sponsor she was tasked with investing, is a 'massive conflict of interest'.

Launching fresh rounds of attacks on Sebi Chairperson Madhabi Puri Buch after the latter gave point by point rebuttal on Hindenburg's report published on 10 August, the US short seller asked if the Sebi chief will publicly release the full list of consulting clients and comit to a transparent or public investigation into these issues.

"Given this, will she publicly release the full list of consulting clients and details of the engagements, both through the offshore Singaporean consulting firm, the Indian consulting firm and any other entity she or her husband may have an interest in? Finally, will the SEBI Chairperson commit to a full, transparent and public investigation into these issues?," it added.

What Is Conflict Of Interest?

A conflict of interest happens when a person or an entity's personal interests clash with their professional duties or responsibilities. This Conflict Of Interest is often cited in cases where the person or the entity is having to compete for loyalty, that may consequently color the judgement that the former might be participating in. Cases where Conflict Of Interest may persist, the person or entity involved is usually asked to step aside or legally required to recuse themselves.

Sebi's Conflict Of Interest Code For Its Board Members Including Its Chief

- The Code was approved in December 2008 when CB Bhave was the chairman of SEBI. The code explains the rationale for such mechanism, which is "to ensure that it conducts in a manner that does not compromise its ability to accomplish its mandate or undermine the public confidence in the ability of Member(s) to discharge his responsibilities“.

- The Code mainly emphasises conflict of interest and disclosures.

- The general principles of the code say that a member will take all steps necessary to ensure that any conflict of interests, to which they may be subjected to, does not affect any decision of the Board. The member is also required to disclose interests that may conflict with their duties. It also states that members will not exploit to their personal advantage, any personal or professional relationship with regulated entities or any employee of such entities. No member will hear or decide any matter if there is a conflict of interest and includes the SEBI chairperson, as per the Code. 

- The Code also states that if there is a possibility of conflict concerning the board meeting agenda, then a member directly or indirectly interested in any matter coming up for consideration at a meeting of the Board will disclose the nature of his interest at the meeting. Also, the member should not take part in any deliberation or discussion of the Board concerning such matter unless sought by the Board.

- The Code has also prescribed a mechanism for disclosure of holdings of securities. The code says a member will disclose their holding of shares and holdings of shares of their family within 15 days of joining, and also disclose their holding of shares and holdings of shares of his family at the end of each financial year within 15 days of the close of the financial year.  A whole-time member shall disclose substantial transactions by themselves and their family within 15 days of such transaction. The substantial transaction for this purpose means transactions of at least 5,000 shares or shares of a value of at least Rs 1,00,000. Board members are also prohibited from dealing in securities of a company listed on a stock exchange based on insider information which they get to know while dealing with the case.

- The procedure for managing the conflict is also prescribed, a member shall disclose a conflict of interests at the earliest possible opportunity, a member shall seek determination from the Chairman if he/she doubts whether there is a conflict of interests or not, the Chairman shall seek determination from the Board if he/she doubts whether there is a conflict of interests or not, If the Chairman or the Board, as the case may be, determines that there is a conflict of interests, the Member or Chairman shall refrain from dealing with the particular matter.

- It also mandates the members to disclose any post, other employment, or fiduciary position which a member holds, or has held in the past five years in connection with any regulated entity; any other significant relationship, including a professional, personal, financial, or family relationship held in connection with a regulated entity; and any honorary position, by whatever name called, in any organisation.

- However, any member nominated by the Government of India or the Reserve Bank of India is exempted from filing the disclosures under if similar disclosures are being made by such Member to the parent organisation as per their code of conduct or service regulations and confirmation to this effect is submitted.

- According to the SEBI statement, relevant disclosures required in terms of holdings of securities and their transfers have been made by the Chairperson from time to time. The chairperson has also recused herself in matters involving potential conflicts of interest.

- The code says that disclosures by the Chairman may be scrutinised under the authority of the Board with due regard to Chairman’s responsibility.