On conflict of interest of SEBI chairman

IIt’s been more than two weeks Hindenburg Research report reveals serious conflict of interest against the Chairman of Securities and Exchange Board of India (SEBI). Two separate responses were issued to the report on August 11 – an unsigned statement from SEBI and a joint statement issued by Madhabi and Dhaval Buch. These statements actually confirmed the veracity of Hindenburg’s disclosures, raising further doubts over the integrity of the regulator. As the appointing authority of SEBI’s full-time members, the central government should offer clarification to all stakeholders.

Did the government know?

The first conflict of interest highlighted by Hindenburg relates to an investment of $8,72,762 (over Rs 5.6 crore at 2015 exchange rates) made by Madhavi and Dhaval Buch through Mumbai-headquartered IIFL Wealth & Asset Management Ltd (now renamed 360 One) in Bermuda-based Global Dynamic Opportunities Fund (GDOF Cell 90 (IPEplus Fund 1)).

The joint statement by Madhabi and Dhaval Buch confirms the investment made in 2015 and clarifies that it was managed by the fund’s chief investment officer (CIO) Anil Ahuja, who was “a childhood friend of Dhaval from school and IIT Delhi and had a strong investment career spanning several decades, being a former employee of Citibank, JP Morgan and 3i Group PLC”. The investment was redeemed in 2018 when Anil Ahuja left his position as the fund’s CIO, the statement said. However, the joint statement does not mention that when this investment was made, Anil Ahuja was also a director of Adani Enterprises Ltd and continued to hold that position until May 31, 2017. An email exposed by Hindenburg shows that it was Madhabi Buch who sent the redemption request to the GDOF on behalf of Dhaval Buch on February 25, 2018, even though she was already a whole-time member of SEBI (appointed on April 5, 2017).

Also read: Why is SEBI’s credibility doubted? | Explanation

Therefore, two obvious questions arise: First, was Madhabi Buch’s investment in the offshore fund run by the director of Adani Enterprises disclosed to the central government before her appointment as a full-time member of SEBI? Second, did her shareholding in the offshore fund have board approval from her appointment in April 2017 until its redemption in February 2018? The central government must clarify this.

Relevance of the Adani Group investigation

Hindenburg’s revelations are significant for the ongoing Sebi investigation into Adani Group companies as well as the Supreme Court order of January 3, 2024. While ruling that the investigation into Adani Group companies need not be transferred from Sebi to a Special Investigation Team (SIT) or the CBI, the Supreme Court had held that “threshold for such transfer of investigation does not exist”. The Supreme Court-appointed expert committee had in its report detailed how the Sebi (Foreign Portfolio Investors) Regulations, 2014 were weakened in 2018 and 2019 to enable concealment of the “ultimate beneficial owners” of offshore funds. The expert committee demonstrated that these regulatory amendments made it difficult to establish the ultimate beneficial owners of the 13 offshore funds that were suspected by Sebi to be masks of the Adani promoter group.

The funds under Sebi’s scrutiny include Emerging India Focus Fund and EM Resurgent Fund, which were managed by IIFL Wealth and Asset Management Ltd (360 One), as revealed by the Organised Crime and Corruption Reporting Project (OCCRP). Was the expert committee aware of Madhabi Buch’s investments in such opaque offshore funds through IIFL Wealth and Asset Management Ltd (360 One), which was managed by a director of Adani Enterprises, even after she joined Sebi as a whole-time member? This blatant conflict of interest was not reported in the expert committee report as well as the apex court order.

Further, SEBI had approved the acquisition of Ambuja Cements and ACC by the Adani Group in August 2022, while Madhabi Buch was the chairperson. In response to an RTI query in April 2023, SEBI revealed that its chairperson had a meeting with the Adani Group chairman on August 11, 2022, at SEBI headquarters to “discuss the open offer applications of Ambuja Cements and ACC”. A second meeting between the two took place on October 3, 2022, on an unspecified agenda.

The Adani Group disclosed on August 23, 2022 that the acquirer of controlling stake in these cement companies was a Mauritius-based company whose ultimate beneficial owner was Vinod Adani, thereby considering him part of the promoter group. Despite this, the Adani Group has continued to maintain that Vinod Adani is not a “related party” in the case of suspicious transactions in Adani shares by FPIs or offshore funds linked to him.

This ambiguity by the Adani Group was enabled by successive amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) since 2018, which redefined “related party” and “related party transaction”. While the expert committee flagged the LODR amendments as regulatory weaknesses, SEBI’s approval for the acquisition of Ambuja Cements and ACC acquisitions by the Adani Group was never examined.

SEBI’s investigation into violations of promoter shareholding norms by listed Adani Group companies began in October 2020. Despite the Supreme Court asking it to complete the probe by April 2024, a SEBI statement on August 11, 2024 described the status of the probe as “near completion”.

In view of the conflict of interest of the SEBI chairman, this is not only a “clear, deliberate and deliberate inaction” on the part of the regulator but also a well-planned cover-up operation. This requires the investigation to be handed over to the SIT or the CBI. The role of the current SEBI chairman and IIFL Wealth and Asset Management Ltd (360 One) in all investigation cases related to Adani Group companies since 2018 should also be brought under scrutiny.

Other conflicts

Hindenburg has also raised concerns over the SEBI chairperson’s shareholding in two consulting companies, India-based Agora Advisory and Singapore-based Agora Partners. Madhabi and Dhaval Buch’s explanation that these companies “became inactive soon after her appointment to SEBI” is prima facie incorrect. The statement itself contradictorily claims that “after Dhaval retired from Unilever in 2019, he started his own consultancy practice through these companies” which allowed him to “work with major clients in Indian industry”.

Madhabi Puri Buch served as a whole-time member of SEBI between April, 2017 and October, 2021 and was subsequently appointed its Chairperson in March 2022. Documents from India’s Ministry of Corporate Affairs show that as of March 31, 2024, Ms Buch owns 99% of the shares of Agora Advisory Private Limited. The private company, which is active to date, has generated revenues of over Rs 3.6 crore between 2017 and 2024. The SEBI Chairperson, who was a whole-time board member since 2017, has continued to hold another office of profit in violation of SEBI’s “Code on Conflict of Interest for Board Members” (Section 5.1). This not only makes her position as SEBI Chairperson untenable but also incriminates the entire Board as well as its appointing authority for allowing such a breach of its own code of conduct. All clients of Agora Advisory Private Limited and Agora Partners must be immediately disclosed and possible transactions investigated.

Hindenburg has also revealed that Dhaval Buch’s current employer, multinational private equity firm Blackstone, directly benefited from the SEBI chairman’s aggressive promotion and regulatory decisions with respect to real estate investment funds (REITs). In response, SEBI said that “the claim that SEBI’s promotion of REITs among various other asset classes was solely to benefit a large multinational financial group is unjustified”.

Thus, neither the SEBI chairperson’s refusal to promote REITs nor the fact that her husband’s employer Blackstone made thousands of crores of rupees in profits through three of the four REIT IPOs that SEBI has approved till date. The Securities and Exchange Board of India Act, 1992 empowers SEBI to protect the interests of investors and to promote and regulate the development of securities market. Promoting individual asset classes such as REITs is not the function of SEBI as defined under the laws. Rather, such favouritism towards a specific asset class by the SEBI chairperson, especially when his or her spouse is employed in a major company benefiting from such preferential treatment, is violative of the Securities and Exchange Board of India (Conditions of Service of Chairperson and Members).

SEBI regulations prohibit the Chairman or whole-time members from holding any financial or other interest which is likely to affect prejudicially their functions.

What next?

The conflicts of interest with the SEBI chairman are evident from his own statements and actions, which is why SEBI’s citing of the conflict of interest in Hindenburg as a short-seller to undermine its subsequent disclosures does not make much sense. They must be addressed systematically to restore the regulator’s credibility.

Retail investor participation in the Indian securities market has surged in the last few years. The latest Economic Survey estimated that nearly 20% of Indian households are now investing their household savings in the financial markets. A compromised securities market regulator only increases the risk to their financial security and overall financial stability.

Prasenjit Bose is an economist and activist.