SEBI’s Supervisory Dysfunction a Threat to PSBs’ Financial Stability

The regulations imposed by market regulator Securities and Exchange Board of India (SEBI) are crucial in enhancing investor confidence by maintaining transparency and accountability in banks’ dealings with the securities market. Banks rely on this confidence since it directly impacts their ability to raise funds from equity and debt markets.

An unambiguous regulatory structure guarantees that investors may depend on financial disclosures offered by banks, thereby diminishing the perceived risk associated with investing. SEBI’s oversight ensures market integrity by implementing regulations that prohibit market manipulation, insider trading, and other unethical activities. By conforming to these standards, banks ensure a stable operational environment, reducing the likelihood of financial crises caused by market anomalies.

Banks adhere to SEBI’s rigorous corporate governance regulations, which ensure strict administration and scrutiny. This reduces the probability of mismanagement, fraud, and other failures in corporate governance that could lead to significant financial losses.

Effective corporate governance is particularly vital in the context of bank mergers, since it ensures that these transactions are carried out in a way that protects the interests of all stakeholders, including minority shareholders. The laws imposed by SEBI, therefore, play a crucial role in safeguarding the interests of minority shareholders, especially in situations involving corporate actions, like mergers, acquisitions, or restructuring.

SEBI’s requirements are also applicable to public sector banks (PSBs), specifically those that are listed on the stock exchange and have diverse impacts on the functioning of PSBs, including:

Capital Raising: PSBs need to comply with the disclosure and listing standards set by SEBI when issuing debt instruments, conducting initial public offerings (IPOs), or performing follow-on public offerings (FPOs).

Corporate Governance: SEBI’s governance regulations apply to publicly listed PSBs, ensuring their compliance with the requirements for board composition, transparency, and disclosure standards.

Market Conduct: PSBs that participate in trading, investment, and underwriting operations are required to adhere to SEBI’s laws to avoid conflicts of interest and maintain the integrity of the market.

PSBs in India, particularly those with a public listing or involvement in the capital markets, are vulnerable to regulatory or managerial issues at SEBI. Stock prices could fall and raising capital could become more challenging if investors lose faith in SEBI’s regulatory oversight if they believe it is ineffective.

The potential for malpractice and financial mismanagement inside PSBs may increase if SEBI’s management were to be disrupted, which, in turn, would weaken corporate governance. Market operations, mergers and acquisitions, and the economy could all be impacted by SEBI’s inefficiencies. Ultimately, the financial stability of PSBs, the integrity of the market, and investor confidence -- all depend on SEBI’s ability to do its job well.

SEBI chairperson Madhabi Puri Buch’s ownership of offshore entities linked to alleged siphoning scams while holding a top regulatory position, undermines regulatory integrity and raises several concerns about potential conflict of interest.

Recent whistleblower documents reveal that the SEBI chief had a financial stake in obscure offshore entities that were allegedly used in the illicit act of siphoning funds from a big corporate group that was previously highlighted by Hindenburg Research. Although Buch said she transferred the shares to her husband after assuming the top position at SEBI, the timing of this transfer suggests this was possibly intended to avoid scrutiny rather than exhibit a commitment to transparency and ethical principles.

Such a scenario can generate apprehensions about the impartiality of SEBI, especially if Agora Partners (a Singaporean consulting firm) had clients who could have had a personal stake in the regulatory decisions taken by SEBI’s chairperson.

If Agora Partners had any affiliations with private corporations or offered consultancy services to firms that gained advantages from SEBI’s regulations, it could indicate a potential bias in regulatory measures that prioritise these private entities. This could lead to PSBs facing a competitive disadvantage, as they would be operating in a market where the regulator may lack impartiality. 

Should the regulatory framework exhibit a bias toward private enterprises, PSBs, which are already grappling with fierce competition from private firms, may see heightened challenges in sustaining their market share and profitability.

The case of Madhabi Puri Buch and Agora Partners highlights the potential danger of regulatory capture, wherein corporate interests exert influence on regulatory decisions at the expense of the public good. This can lead to a situation where privatisation is accelerated but at the cost of PSBs.

The constant favouring of private firms in regulatory measures has the potential to damage PSBs, which play a crucial role in guaranteeing financial inclusion and supporting the economy. This would hurt the stability and growth of India’s economy, as well as the banks themselves.

Agora Partners’ lack of obligation to disclose financial statements also raises concerns about the firm’s revenue sources and clients, leading to a lack of clarity and understanding. The absence of transparency poses a problem, as it hinders a thorough assessment of the possible impact of conflicts of interest on SEBI’s regulatory decisions.

The heads of regulatory organisations like SEBI, therefore, must uphold absolute transparency regarding their financial interests and avoid any possible conflicts of interest to maintain their credibility. Failing to do so could lead to erosion of public trust in the financial markets.

The supplementary details concerning Buch’s association with Agora Partners serve to underscore the possible hazards and ethical dilemmas that can develop when regulatory bosses possess personal commercial stakes, especially in offshore firms. This  not only raises questions about SEBI’s neutrality but also highlights the broader risks to the financial system and public sector institutions.

To ensure a just and steady financial market where both public and private institutions can compete on an equal footing, it is crucial for regulatory agencies to strictly adhere to ethical norms, accountability, and openness.

If SEBI’s regulations or management are found to have been undermined, PSBs may face significant repercussions. The financial market might get destabilised due to compromises in corporate governance, lack of transparency, and reduction in investor trust. This would have a detrimental impact on the ability of PSBs to raise money and sustain profitability. The presence of regulatory capture, where private interests exert undue influence on SEBI’s decisions, might lead to an imbalanced playing field for PSBs. Excessive privatization may marginalise PSBs due to skewed regulations, lowering their market share and ability to support national economic goals.

From this, we can understand the inherent risks that offshore monies and non-transparent financial activities hold for PSBs in India. The absence of resolute regulatory measures by SEBI, coupled with the perils linked to intricate investment frameworks, has the potential to jeopardise the stability and fiscal well-being of PSBs.

Such a scenario not only endangers the banks themselves but also presents wider systemic hazards to India’s financial system. To protect against these risks, regulatory agencies, such as SEBI, must implement strict compliance procedures, guarantee more transparency, and maintain the integrity of the financial markets. Any failure to resolve these problems may lead to significant economic repercussions, underscoring the importance for both regulators and financial institutions to maintain a watchful and proactive approach in their supervision and risk management procedures.

The writer is pursuing a Ph.D. From Jamia Millia Islamia (a Central university) New Delhi. The views are personal.