SEBI’s Response to Hindenburg Allegations: Addressing Conflict of Interest and Regulatory Integrity

Recently, Hindenburg Research, the US-based short seller, alleged in a report that Madhabi Puri Buch, the chairperson of stock market regulator Securities and Exchange Board of India (SEBI), and her husband had a stake in offshore entities connected to the Adani group. 

• In such a scenario, SEBI board is supposed to address conflicts of interest. 

The market regulator SEBI said that it had “duly investigated” Hindenburg’s allegations against the Adani Group.

• The SEBI also said that its chairperson had made the required disclosures in “terms of holdings of securities and their transfers”, and that she had recused herself in matters involving “potential conflicts of interest”.

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About SEBI’s Code on Conflict of Interest

SEBI’s ‘Code on Conflict of Interest’ seeks to ensure that the board ‘conducts in a manner that does not compromise its ability to accomplish its mandate or undermine the public confidence’ in the body.

• About Conflict of Interest: According to the Code, it refers to “any personal interest or association of a board member, which is likely to influence the decision of the Board in a matter, as viewed by an independent third party”. 
  • It can constitute a number of different things, which are either barred altogether or need to be disclosed by the concerned board member.
• Comprises:
  • Certain Transactions in Shares: The Code says that a member must disclose their, and their family’s (spouse, dependent children below 18 years of age) holdings within 15 days of the assumption of Office, and annually update this disclosure within 15 days of the close of the financial year. 
    • Moreover, substantial transactions (greater than 5,000 shares or of monetary value of 1 lakh) need to be disclosed within 15 days of such a transaction. 
    • Also, members are not allowed to deal in shares based on “unpublished price sensitive information which he may have got access to”.
  • Outside Private Activities: SEBI board members are not allowed to hold any other office of profit, i.e. a position that brings or has the potential to bring to the person holding it some financial gain, advantage, or benefit. 
    • They are also not allowed to engage in any other professional activity, “which entails receipt of salary or professional fees”.
  • Acceptance of Gifts: Board members are not allowed to accept “any gift by whatever name called, to the extent possible, from a regulated entity”. 
    • If they do receive such a gift whose value exceeds Rs 1,000, they have to hand it over to the General Services Department of the SEBI, and are not allowed to keep it.
  • Miscellaneous Situations: Members are bound to disclose “any post, other employment or fiduciary position” which they hold or have held in the past five years, in connection with any regulated entity. 
    • It includes being a board member of a company, or being employed as a consultant by a company. 
    • They must disclose “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”.
• Procedure to Manage Conflict of Interest: SEBI board members are to “take all steps necessary to ensure that any conflict of interest does not affect any decision of the Board” and not to “exploit to his personal advantage, any personal or professional relationship with regulated entities or any employee of such entities”.
• Disclosures and Recusals: Disclosures have to be made “at the earliest possible opportunity”. If any member is unsure whether there is a conflict of interest or not, they “shall seek determination from the Chairman”. 
  • If the chairman is in doubt regarding their own conflict of interest, she has to “seek determination from the [entire] Board”.
• No Exception: If the chairman or the board determines that there is indeed a conflict of interest, the concerned member “shall refrain from dealing with the particular matter”. No Member shall hear or decide any matter where he/she has a conflict of interest and there is no scope for an exception.
• Confidentiality: As per the Code, the information as disclosed under this Code shall be kept confidential save in the following circumstances. These circumstances include:
  • Where there is a requirement for disclosure for the purposes of managing potential or actual conflicts;
  • Where there is a requirement for disclosure following the change of responsibilities of a Member;
  • Where there is a requirement for the purposes of disciplinary proceedings; or
  • Where there is any legal or regulatory obligation to disclose the information.
• Maintained by: The custody of all documents/records pertaining to board members’ disclosures is maintained by the secretary to the board. 
  • Members of the public can bring material evidence to this secretary in case they believe that “a Member has an interest in a particular matter”. The secretary is obligated to place the details of such a matter to the board.

About Conflict of Interest

Conflict of Interest is a situation where an individual’s personal interests or financial interests may influence their ability to make impartial decisions in their professional capacity.

• Refers: Conflict of Interest means “any interest which could significantly prejudice an individual’s objectivity in the decision making process, thereby creating an unfair competitive advantage for the individual or to the organisation which he/she represents”. 
  • It also encompasses situations where an individual, in contravention to the accepted norms and ethics, could exploit his/her obligatory duties for personal benefits.
• Actual Conflict of Interest: An actual conflict of interest arises when an individual’s personal interests directly conflict with their professional duties.
  • Examples:
    • A government official who holds shares in a company that is bidding for a government contract.
    • A doctor who receives a commission from a pharmaceutical company for prescribing their drugs.
    • A judge who owns shares in a company that is involved in a case before them.
    • A police officer who receives gifts or favors from a suspect they are investigating.
    • An auditor who is hired by a company to audit their financial statements, but also provides consulting services to the same company.
• Potential Conflict of Interest: A potential conflict of interest arises when an individual’s personal interests could potentially influence their professional duties.
  • Examples:
    • A financial advisor who receives a commission for recommending certain investment products to clients.
    • A journalist who owns shares in a company they are reporting on.
    • A lawyer who represents a client whose interests conflict with their own personal beliefs.
    • An academic researcher who receives funding from a company that produces a product they are researching.
    • A public official who has close personal or financial ties to a company that is seeking a government contract.

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Types of Conflict of Interest

Various types of Conflict of Interests are mentioned below:

• Financial Conflicts of Interest: It occurs when an individual or organisation stands to benefit financially from decisions or actions taken in their professional capacity. 
  • This conflict can arise when a financial advisor receives kickbacks from institutions for recommending or selling certain financial products.
• Relational Conflicts of Interest: It arises when personal relationships influence professional decisions. These can include familial ties, friendships, etc. 
  • Example: A manager might favour a friend or relative for a promotion, or a board member might advocate for a contract with a company owned by a family member.
• Professional Conflicts of Interest: It occurs when competing professional duties or allegiances interfere with impartiality. 
  • Example: A lawyer representing two clients with opposing interests faces a professional conflict. 
• Ideological Conflicts of Interest: It arises when personal beliefs or values clash with professional responsibilities. 
  • Example: A researcher with strong environmental views might struggle to remain objective while conducting a study funded by an oil and gas corporation.
• Time-Based Conflicts of Interest: It occurs when an individual’s commitments to multiple roles or projects lead to divided attention and compromised effectiveness. 
  • Example: An employee working for two companies simultaneously might not be able to fully dedicate themselves to either role.
• Organisational Conflicts of Interest: It occurs when an entity’s interests conflict with those of its stakeholders or the public. 
  • Example: A non-profit organisation that receives funding from a corporation might face pressure to align its activities with the interests of the donor, even if it conflicts with its mission.

Positive Aspects of Conflicts of Interest

In general, conflicts of interest are bad. However, there are reasons they arise, and these reasons may actually give a company good reason to have the conflict arise. 

• Bring Betterment: In some cases, individuals with conflicts of interest may bring valuable expertise and knowledge to a situation. 
  • Example: A board member with financial ties to a relevant industry might offer insights that enhance decision-making processes. If this expert is heavily tied to the community or industry, they are bound to have conflicts that come along with their expertise.
• Strengthen Collaborations: Conflicts of interest often arise from existing relationships and networks. Leveraging these connections can lead to beneficial collaborations and partnerships. 
  • Example: A business executive with personal relationships in the industry might facilitate strategic alliances that enhance organisational growth. For this reason, a company may pursue someone who intentionally would have conflicts of interest because of their large network or relationships.
• Innovation: Financial conflicts of interest, when managed correctly, can actually stimulate innovation and investment. 
  • Example: A researcher with financial interests in a startup may be more motivated to push the boundaries of innovation because they have more of a personal stake in the success of the company. Hence, financial ties can create a positive incentive (that also comes with some risk).

Challenges Associated with Conflicts of Interest

Following are the concerning challenges associated with the Conflict of Interest:

• Biased Decision-Making: Conflicts of Interest may prioritise personal interests or the interests of a particular thing over others when faced with a conflict of interest. 
  • This can lead to decisions that benefit themselves or their associates rather than the broader cause.
• Loss of Objectivity: Conflicts of interest can affect judgement and undermine objectivity which may find it challenging to make impartial decisions when personal interests are at stake.
• Favouritism: Persons with conflicts of interest may show favouritism towards individuals or organisations with whom they have a personal relationship or financial interest, leading to unfair treatment of others.
• Compromised Integrity: Engaging in decision-making while having a conflict of interest can compromise the integrity and erode trust.

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Management of Conflict of Interest

Effectively managing conflicts of interest is crucial to maintain trust and integrity. There is a need to follow six R’s, which are Recognize, Record, Reveal, Recuse or Restrict involvement in decision-making processes related to the conflict, and Review regularly. 

• Spotting Conflicts: First off, there is a need to identify any conflicts of interest. With disclosure, one can quickly assess and address any conflicts before they escalate.
• Grasping the Impact: Understanding the consequences of conflicts of interest is vital. They can lead to legal troubles, financial losses, and erosion of trust. .
• Maintaining Transparency: Transparency needs to be involved in all scenarios to counter the  abuse of power.  
• Focus on Objectivity: This skill helps to take impartial decisions and help establish integrity.  
• Behavioural Integrity: Ensuring high standards of behavioural integrity is must.  
• Need for Legislation: There is a need to provide clear guidance to address the conflict, ensuring fairness and transparency throughout.
  • There is a need for legislation to make non-disclosure of conflict of interest punishable. 
• Monitoring and Review: Regular review and assessment can help identify any new conflicts or changes that require attention.  Continuously monitor the situation to ensure that the conflict of interest is effectively managed. 
• Creating Awareness: There is a need to create awareness about conflict of interest and its potential impact, and the importance of avoiding such situations. 
• Training is Valuable: There is no substitute for education. In training sessions, there has an opportunity to become familiar with the terms, learn how to deal with conflicts and run through some scenarios.

Conclusion

In any situation, the individual’s personal interests could potentially influence their professional duties, creating a conflict of interest. It is important for professionals to be aware of these potential conflicts and take steps to manage them, such as recusing themselves from decision-making processes, disclosing potential conflicts to relevant parties, or seeking guidance from an ethics committee.

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