Allegations mount against India market regulator

As the first female chairperson to lead Sebi, Madhabi Puri Buch is considered a trailblazer in many ways

India’s market regulator is facing a threat to its credibility after a barrage of allegations against its chief, top fund managers have told the BBC.

Multiple charges, mostly around conflict of interest, have surfaced against Madhabi Puri Buch, chairperson of the Securities and Exchange Board of India (Sebi), from at least four different corners over the past month. She has denied most of them and not publicly responded to some.

This comes amid a bull run in India’s equity markets, which are among the world’s best performing this year.

Foreign investors have pumped in over $6bn (£4.5bn), while millions of new mom-and-pop investors have opened electronic accounts to invest in a mutual funds and initial public offering (IPO) frenzy.

Trouble for Ms Buch began in August when US-based short-seller Hindenburg Research accused her and her husband of holding investments in an offshore fund used by the Adani Group, implying it was why Sebi was dragging its feet on an investigation against Adani over allegations of accounting fraud and market manipulation.

Since then a number of other accusations have come to the fore.

The main opposition Congress party has accused Ms Buch of receiving rental income from a company she was investigating. It has also alleged that she held an "office of profit" at ICICI Bank, one of India’s largest private lenders, continuing to earn large sums of money through Employee Stock Ownership Plans (Esops) long after her stint with them was over.

Last week, staff members staged a rare protest outside Sebi's headquarters

Subhash Chandra Goyal, the chairman emeritus of media giant Zee Entertainment Enterprises, blamed her for the collapse of a merger between his company and Sony Enterprises, stating "I am convinced that the Sebi chairperson is corrupt" and calling her "vindictive" in a press conference. He is currently facing regulatory action, charges of fund diversion and is barred from holding key posts in listed firms.

But perhaps most damaging of all is growing internal dissent within Sebi, which has now spilled out into the public domain.

On 5 September, furious staff members staged a rare protest outside the regulator’s headquarters demanding Ms Buch’s resignation. Around 1,000 employees had reportedly complained of a toxic work culture in a letter to the finance ministry earlier, local media reported. They complained of "immense pressure" and "shouting, scolding and public humiliation” becoming a norm in meetings.

Sebi has publicly rejected the claims as “misplaced”, adding that “junior officers have been misguided, perhaps by external elements”.

However, protesters on Thursday called for an immediate retraction of this statement.

“This is unprecedented,” says Hemindra Hazari, an independent business analyst. “Until yesterday it was allegations from the outside, now internal problems have become public. Something is seriously wrong.”

Ms Buch has strongly defended herself, denying any conflict of interest claims in the Hindenburg case, while ICICI Bank has denied paying her a salary or Esops and said she only received her retirement benefits after she left the bank. The Sebi chief has so far not made a public statement on protesting employees or the criticisms levelled at her by Mr Chandra.

Sebi didn't respond to the BBC's request for comment.

India's main opposition Congress party has held protests demanding a parliamentary probe into the allegations against Ms Buch

An alumnus of India’s premier management school, Indian Institute of Management Ahmedabad, Ms Buch is a trailblazer in many ways. The youngest and first female chairperson to lead Sebi, she became the first chief to have come from a private corporate background.

Despite being credited for reforming Sebi with stricter insider trading rules and auditing frameworks, allegations of a lack of transparency in her own financial affairs raise serious concerns about whether Sebi holds its top officials to the same standards it expects from public companies, experts say.

“The crux of the issue is about disclosure rules governing the senior-most officials at regulatory bodies, given their access to unpublished price-sensitive information. Their orders and decisions can dramatically impact stock prices, raising the stakes for stringent disclosure and compliance norms,” writes Sucheta Dalal, a veteran financial journalist, in a column for Moneylife magazine.

Standards for heads of regulators are much more stringent in developed countries where they are required to, for instance, “divest from direct holdings in entities that could post conflict of interest”, says Ms Dalal, adding that certain discrepancies in the statement put out by ICICI Bank about its Esop policy have complicated rather than clarified matters.

Regulators like Sebi typically have political appointees and lateral hires from the private sector. Sebi is run by a board with members from the finance ministry, the central bank and others nominated by the federal government.

The Buch episode is a “learning” not just for Sebi, but also for other Indian regulators like the insurance watchdog or the Competition Commission to apply more robust disclosure processes, says Shriram Subramanian of the proxy advisory firm InGovern Research.

“It will bring more transparency,” Mr Subramanian adds.

India's stock markets are among the best performing in the world

For the moment, investors seem unperturbed by the events of the past month.

“Global investors already pay a regulatory risk premium when they invest in India, they will ignore this,” said a veteran trader.

But things could take a turn for the worse if the controversy snowballs further, says Mr Hazari.

“Institutional money can flee if internal warnings go out around compliance issues. And then retail investors will slowly start pulling out of the market,” he adds.

With pressure mounting from both outside and inside Sebi, some say Ms Buch is now faced with the very real question of leaving her post.

Her position was "untenable" a few weeks ago, but has become increasingly "unsustainable" now, Subhash Garg, a former finance secretary, told journalist Barkha Dutt on Mojo Story, a digital outlet.

A resignation or a suspension would be seen as an admission of guilt, which neither Ms Buch nor the government would want.

At least three market experts the BBC spoke with said the most likely outcome of the controversy will be that Ms Buch's appointment won’t be renewed. Her current three-year tenure as chairperson ends in February 2025.

“For me what’s most astounding is that the government has been totally silent. They need to step in now. When serious allegations are made against the head of a regulator, the government or the judiciary are the only higher authorities which can authorise a credible investigation,” said Mr Hazari.

Others have also called for the board of Sebi to step in and publicly address the allegations.

An executive at a foreign fund house who spoke to the BBC on condition of anonymity said global investors will watch the way the government handles the matter, and how swiftly it acts.

“This will affect investor sentiment going forward,” he said.