Will SEBI’s supervisory dysfunction jeopardise financial stability of Indian banks?

Allegations against Madhabi Buch could potentially hamper PSBs’ ability to compete in a market where private entities might gain unfair advantages.

The performance of SEBI has a direct impact on market operations, mergers and acquisitions, and the overall economy. | Photo Credit: Special Arrangement

The integrity of India’s financial markets has been called into question following allegations of conflict of interest against Madhabi Buch, the current chairperson of the Securities and Exchange Board of India (SEBI). These accusations stem from Buch’s purported connections to the Adani Group through investments in offshore funds, raising concerns about potential regulatory favouritism and its wider implications for the financial industry.

Notably, the regulatory oversight of SEBI has a deep influence on public sector banks (PSBs) in India, especially those engaged in capital markets. If there are any inefficiencies or disruptions in SEBI’s management, it could potentially erode investor confidence, leading to a decline in stock prices and making it harder for PSBs to raise capital. This could potentially lead to issues such as malpractice and financial mismanagement, which could undermine the overall corporate governance within these banks.

In addition, the performance of SEBI has a direct impact on market operations, mergers and acquisitions, and the overall economy. As a result, SEBI’s efficient and consistent regulatory oversight is essential for preserving the market’s integrity, investor confidence, and the financial stability of PSBs.

Whistle-blower documents reveal that the chairperson of SEBI had a financial stake in obscure offshore entities that were used in the illicit act of siphoning funds from Adani. Although she transferred the shares to her husband after assuming the position of SEBI chairperson, the timing of this transfer suggests that she intended to avoid scrutiny rather than to exhibit a commitment to transparency and ethical principles. This 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 such as the Adani Group 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 would lead to public sector banks 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 towards private enterprises, public sector banks, already grappling with fierce competition from private firms, may see heightened challenges in sustaining their market share and profitability.

Securities and Exchange Board of India (SEBI) chairperson Madhabi Puri Buch in Mumbai on June 27, 2024. | Photo Credit: PTI

The case of 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 public sector banks. The constant favouring of private firms in regulatory measures has the potential to damage public sector banks, 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 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 such as SEBI must uphold absolute transparency regarding their financial interests and avoid any possible conflicts to maintain their credibility. Failing to do so could lead to a decrease in public trust in the financial markets.

The supplementary details concerning Buch’s association with Agora Partners underscore the possible hazards and ethical dilemmas that can develop when regulatory leaders possess personal commercial stakes, especially in offshore firms. This circumstance not only gives rise to 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 were undermined, public sector banks may face significant repercussions.

PSB risk

The financial market might become 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 public sector banks. Excessive privatisation may marginalise PSBs due to skewed regulations, lowering their market share and ability to support national economic goals.

From this, we can emphasise the inherent risks that offshore monies and non-transparent financial activities offer to public sector banks in India. The absence of resolute regulatory measures by SEBI, coupled with the perils linked to intricate investment frameworks, has the potential to greatly jeopardise the stability and fiscal well-being of PSBs. This scenario not only endangers the banks themselves but also presents wider systemic hazards to India’s financial system, considering the crucial function that PSBs fulfil in the economy.

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. Neglecting 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.

Tajamul Rehman Sofi is pursuing a Ph.D at Jamia Millia Islamia, New Delhi.