Finance Ministry has no other alternative than to refer complaints against the present Chairperson of SEBI for an enquiry by an independent judicial commission

To

Smt Nirmala Sitharaman

Union Finance Minister

Dear Smt Sitharaman,

Please refer to my letter of 11th August 2024 calling for an independent judicial commission to enquire into the allegations against the Chairman of SEBI . While it would be unfair for anyone to jump to conclusions on this, in the interest of maintaining the credibility of SEBI as an independent regulator of the stock market, the Finance Ministry ought to have acted in a timely manner.

Evidently, your Ministry, for some inexplicable reason, has chosen not to act in the matter, though the SEBI (Terms and Conditions of Service of Chairman and Members) Rules unambiguously place a statutory obligation on your Ministry to get the matter appropriately enquired into. 

Let me cite the relevant provisions of the above cited Rules in this connection:

1. Under Rule 5 of the Rules, the Chairman and the Wholetime Members of SEBI are appointed by the Central Government.
2. Rule 3 (1) stipulates that “the Chairman or the whole-time Member shall be a person who does not, and will not, have any such financial or other interests as are likely to affect prejudicially his functions as such Chairman or Member“
3. Rule 19A(1) stipulates that “a part-time Member shall be a person who does not, and will not, have any such financial or other interest as is likely to affect prejudicially his functions as a part-time Member”

At the time of the appointment of either the Chairman, or a Wholetime Member, or a part-time Member, it is incumbent on the part of the Government (Ministry of Finance) to insist on a disclosure from the candidate on whether he or she fulfills the stipulations laid down as above and it is equally incumbent on the part of the Ministry of Finance to make sure that such stipulation stands fully complied with, when it proposes the candidature of that person to the Appointment Committee of the Cabinet (ACC) which takes the final decision.

If during the tenure of the Chairman, or a Wholetime Member, or a part-time Member, a conflict of interest of the kind referred above arises, or there is a complaint of such a conflict of interest is in existence, it is obligatory on the part of the Ministry of Finance to get the same thoroughly enquired into, as a conflict of interest in the case of the Chairman, a whole time Member or a part-time Member  will throw a shadow on their neutrality which is of critical importance for maintaining the integrity of the stock market and the confidence that investors repose in it. 

The above Rules do not empower either the Chairman of SEBI or SEBI asa regulatory body to grant exemption of any kind from the operation of the above cited requirements, nor can the Chairman, or SEBI as a body, pretend that such exemption exists once they allow the concerned person to “recuse” himself/herself from taking decisions on a matter in which he or she has interest.

As soon as either the Chairman, or SEBI as a body, becomes aware of a conflict-of-interest issue, it is incumbent on their part to bring it immediately to the notice of the Ministry of Finance to enable the latter to take a view at the earliest, so as to minimise its impact on the credibility of SEBI as an independent regulatory authority. 

In particular, under no provision of the Rules whatsoever can the Chairman say that a complaint received against himself/herself has been looked into and give himself/herself a “clean chit”. 

On such complaints, from the point of view of maintaining the credibility of SEBI and the integrity of the stock market, the Ministry of Finance should not only take an unambiguous view at the earliest, but also make it known to the public at the earliest. Every day’s delay in taking a decision would erode the credibility of SEBI, more and more.

In the instant case referred to in my letter of 11th August, 2024, by allowing the complaint to drift without a proper enquiry, the Ministry of Finance has indirectly allowed itself to become a party to it, which in itself has given rise to an impression that the Ministry is shielding the concerned person. Therefore, the only course now open is to refer it to an independent judicial commission to uphold the public interest. 

While a person may be considered innocent till proven guilty, it should not mean that an enquiry into the complaint can be indefinitely delayed!

By not complying with the Rules, framed under section 29 of the Securities and Exchange Board of India Act enacted by the Parliament in 1992, I am afraid that your Ministry has wantonly committed breach of that statute.

May I therefore demand that your Ministry loses no time in referring the matter to an independent judicial commission at least now, though belatedly?

Regards,

Yours sincerely,

E A S Sarma

Former Secretary to the Government of India

Visakhapatnam