Sebi panel proposes new ethics, disclosure framework for officials, board members

A high-level committee set up by the Securities and Exchange Board of India (Sebi) has recommended an overhaul of the regulator's conflict-of-interest, disclosure and ethics framework, aimed at strengthening governance standards and transparency within the institution.

The committee has proposed that candidates for the roles of Sebi chairman, whole-time member (WTM), and other lateral entrants make pre-appointment disclosures of all actual, potential and perceived conflicts of interest, both financial and non-financial, to the appointing authority. The goal is to strengthen transparency at the appointment stage itself and ensure that individuals with personal, professional or financial entanglements that could compromise decision-making are identified in advance.

Once in office, senior Sebi officials will also face mandatory public disclosures of their assets and liabilities, a first for the regulator's top brass. The committee has recommended that the chairman, WTMs and employees with the rank of chief general manager and above file such declarations annually. Part-time members, who are not involved in day-to-day regulation, may be exempted from public disclosures but will still have to report relevant interests internally.

Currently, Sebi board members must disclose conflicts of interest to the board. Any transactions in shares must to be disclosed to the finance ministry before the official is appointed.

Under the proposed system, all Sebi board members and employees, including those on secondment and contractual appointments, will be required to make initial, annual, event-based and exit disclosures of their assets, liabilities, trading activities, family relationships and professional or relational interests.

These will be submitted to a newly proposed Office of Ethics and Compliance (OEC) and overseen by an independent Oversight Committee on Ethics and Compliance (OCEC). The OEC, headed by a chief ethics and compliance officer (CECO) at executive-director rank, will manage ongoing disclosures, while the OCEC will provide independent oversight.

In addition, all Sebi employees and board members could be required to internally disclose the names and relationships of relatives, as defined by the Companies Act, along with any other professional or relational interests that could pose a conflict. The definition of 'family' for these purposes has been expanded to include spouses, dependent children (including adopted and stepchildren), legal wards and others who are substantially dependent on the individual.

However, investment restrictions, which prevent officials from trading in or holding certain securities, will only apply to the employee's family, not the extended circle of relatives or associates. The panel recommended that the same restrictions imposed on Sebi employees under its Employees Service Regulations (ESR) should be uniformly applied to the chairman and WTMs.

They may invest in pooled vehicles such as mutual funds, provided the schemes are professionally managed and regulated by a recognised financial regulator. Even then, investments in any one scheme should not exceed 25% of their financial portfolio. Part-time members will be exempt from these restrictions but must still disclose their holdings and abstain from trading on unpublished price-sensitive information.

Currently, Sebi employees are barred from trading directly in equities and certain other securities because it could lead to conflicts of interest. The same restrictions do not apply to Sebi's top leadership.

Upon joining, the chairman and WTMs will have to choose one of four options for their pre-existing investments: liquidate, freeze or sell them according to a pre-approved trading plan or sell them outright with prior approval. The panel also recommended explicitly including the chairman and WTMs under the definition of "insider" as per Sebi's insider-trading regulations.

In terms of ethical conduct, the committee proposed a ban on the chairman and WTMs accepting gifts -- directly or indirectly -- from any person or entity with whom they have official dealings, except for items of small value given at public events or ceremonies.

It also stressed the need for a robust and technology-enabled recusal system. While the primary onus of declaring conflicts lies with the individual, Sebi should build a digital repository of financial and non-financial disclosures capable of automatically flagging actual or potential conflicts using materiality thresholds, it said.

Summaries of recusals by senior officials -- including the chairman, WTMs, part-time members and senior staff -- should be published in Sebi's annual report to enhance transparency.