Full disclosure for Sebi chief: Key to preventing next Hindenburg-like scandal

The current clash between American short-seller Hindenburg Research and India's markets regulator, the Securities and Exchange Board of India (Sebi), overlooks a crucial issue: the disclosure norms for potential conflicts of interest among regulatory top brass. This is an opportune moment to bring Sebi’s disclosure standards on par with those required of senior civil servants, lawmakers, and election candidates whose asset declarations are made public.

Additionally, when Sebi officials recuse themselves from investigations, these recusals should be part of the public record. Such transparency would help prevent the recurrence of serious allegations in the future.

The allegations in Hindenburg’s 10 August report, Sebi’s responses, and the personal rebuttals from its chairperson, Madhabi Puri-Buch, and her spouse, Dhaval Buch, have sparked a political firestorm. The Opposition has linked the controversy to Parliament's abrupt adjournment on Friday, despite agendas being issued for Monday.

Sebi claims Puri-Buch fulfilled all internal disclosure requirements and recused herself where necessary. Puri-Buch, in her personal capacity, asserts that her family's finances are an open book.

However, for Sebi and its chairperson to remain above suspicion, they must not only be clean but also be perceived as clean. Puri-Buch could set an example by voluntarily disclosing her family's assets. Yet, a government statement might be the most effective way to address the controversy transparently and comprehensively.

Transparency and accountability at Sebi

Given that the Sebi chairperson is appointed by the government following stipulated due diligence, a statement from the Department of Economic Affairs, which oversees capital markets, would reassure investors and bolster Puri-Buch’s credibility.

However, the government should also consider overhauling Sebi’s disclosure norms, demanding greater transparency. 

The 2016 ruling by a full bench of the Central Information Commission (CIC) found no public interest in disclosing the assets and liabilities of then-Sebi chairperson, UK Sinha. The current controversy suggests that this CIC order should be revisited.

Sebi should amend its rules to require the public disclosure of asset declarations and conflict-of-interest statements for senior officials, board members, and the chairperson. Recusals in Sebi investigations should also be publicly recorded to prevent serious controversies.

Hindenburg alleges that the couple held investments worth around $872,000 in an offshore entity linked to the Adani Group. It also flagged their association with a Singapore entity, Agora Partners, which consults with Indian clients. Moreover, Dhaval Buch is a senior adviser with private equity firm Blackstone, a company heavily involved in launching REITs in India—an instrument publicly endorsed by the Sebi chairperson.

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Given the complex web of overseas companies in jurisdictions that obscure beneficial ownership, these accusations may be difficult to prove or disprove. But the point is there should be an investigation, which must be credible to exonerate Puri-Buch. Without such a probe, Hindenburg or other hedge funds could continue making allegations, eventually impacting market sentiment. Tightening disclosure norms is essential before that happens.

Allegations and sentiment

Hindenburg’s tweets about the 10 August report have already garnered millions of views. Only an overhaul of disclosure norms and enhanced transparency will prevent similar episodes in the future.

India boasts one of the world’s largest and most vibrant financial markets. As the fastest-growing large economy, it attracts significant foreign direct and portfolio investments, critical for maintaining its growth momentum.

Hindenburg’s 23 January 2023 report on the Adani Group, seen as “too big to fail”, had led to the withdrawal of a planned public issue. Stocks of group companies had lost $150 billion in value after Hindenburg's first report in January 2023, though shares have since recovered much of the losses.

While the immediate impact on Adani stocks was significant, allegations of undisclosed conflicts of interest at Sebi are even even more concerning. They suggest Sebi’s impartiality in investigations could be compromised and that the regulator’s stance on REITs may be influenced by Dhaval Buch’s association with Blackstone. These accusations directly target the chairperson, potentially alarming foreign investors wary of regulatory risks.

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The government could task the Serious Fraud Investigation Office, Enforcement Directorate, Central Bureau of Investigation, or another agency with expertise in cross-border financing to investigate the allegations. For credibility, such an investigation should be conducted independently of Sebi. Hindenburg and the political opposition would argue that Sebi cannot investigate itself credibly, irrespective of Puri-Buch’s innocence. The government might also consider establishing a Joint Parliamentary Committee (JPC), as it has done in previous market-related scandals.