In a landmark move that comes three decades too late, India's capital markets regulator Sebi has finally decided to implement a legally binding ethics code for its senior leadership. For 33 long years, the Securities and Exchange Board of India operated without enforceable ethical guidelines for its own officials while simultaneously penalizing market participants for similar infractions.
The Culture of Privilege Versus Responsibility
The answer to why this reform took so long reveals an uncomfortable reality about India's regulatory environment. Senior positions have traditionally been viewed as earned privileges rather than positions carrying serious fiduciary duties. This wasn't merely bureaucratic delay but reflected a deeper institutional hesitation to subject regulators to the same strict standards they impose on others.
The existing voluntary code lacked legal teeth and suffered from inconsistent definitions of critical terms like 'family' and 'conflict of interest.' The reform delay became unsustainable only when multiple controversies threatened Sebi's credibility at the worst possible moment.
Retail Investor Boom Forces Accountability
The credibility crisis struck when India could least afford it. Post-pandemic, India added over 60 million new retail investors, fundamentally transforming the market's participant profile. Unlike sophisticated institutional players with legal teams and risk management frameworks, these new investors depend entirely on Sebi to maintain a level playing field.
When allegations about regulators' conflicts of interest began trending on social media and being debated by these newly-minted investors, the stakes became existential. Regulatory credibility transformed from an elite concern to a mass issue affecting millions of ordinary Indians.
Controversies That Forced Change
Two major episodes exposed the systemic failure and provided the final push for reform. The 2024 Madhabi Puri Buch controversy involved allegations of receiving retirement benefits from an ICICI Bank-related entity while questions emerged about her husband's income from a Mahindra & Mahindra-linked firm during Sebi's handling of related cases.
Regardless of the allegations' merit, they revealed a fundamental flaw: Sebi had no mandatory public disclosure requirements for such financial relationships, allowing the appearance of impropriety to persist unchecked.
Earlier, the 2008 C.B. Bhave controversy saw the then-chairman recusing himself from matters involving National Securities Depository Limited, which he previously headed. While Bhave stepped aside, the resulting legal challenges and allegations of undue favor highlighted the urgent need for a formal, structural solution that prevents both actual conflicts and their appearance.
The Proposed Reform Framework
The new three-pronged approach centers around creating an Office of Ethics and Compliance (OEC) and mandates radical transparency. Key elements include:
- Mandatory public declarations of assets and liabilities for chairman, whole-time members, and officials down to chief general manager level
- Treatment of top officials as 'insiders' under Sebi's trading regulations, forcing them to liquidate or freeze existing investments upon joining
- A two-year cooling-off period preventing former senior officials from immediately appearing before or against the regulator
These reforms would bring Sebi in line with global regulators like the US Securities and Exchange Commission and UK's Financial Conduct Authority, which have maintained robust, legally-mandated ethics requirements for decades.
The proposed framework acknowledges that senior officials must demonstrably shed conflicts rather than merely manage them. This principle underpins regulatory credibility worldwide, as demonstrated when Henry Paulson had to divest over $400 million in investments upon becoming US Treasury Secretary in 2006.
The process now requires Sebi Board approval followed by regulatory amendments. While these reforms won't prevent every controversy, they will create the institutional infrastructure necessary for building the unimpeachable credibility that India's rapidly growing retail investor base demands from its markets regulator.
