Sebi notifies conflict-of-interest norm for employees; extends investment rules to family members

Markets regulator Sebi has notified rules for its employees, introducing a comprehensive conflict-of-interest framework, tighter investment restrictions, enhanced disclosure norms and a two-year cooling-off period for employees after they leave the regulator.

The amendments are aimed at strengthening governance, transparency and ethical standards for Sebi employees.

Sebi notified revised conflict-of-interest norms for its board members and senior officials, following a review of the existing framework.

The review was initiated after former Sebi Chairperson Madhabi Puri Buch faced conflict-of-interest allegations by the now-defunct Hindenburg Research. Buch had denied the allegations and was later cleared by the country's anti-corruption body.

The revised framework, approved by Sebi's board last month, includes the voluntary adoption of a stricter code of conduct for senior officials of the regulator.

Under the new rules, employees leaving Sebi due to retirement, resignation, or any other reason will not be allowed to appear before or against the regulator on behalf of any person in any matter, including quasi-judicial proceedings, adjudication, settlement or approval matters, for two years from the date of relieving.

In a notification dated July 7, Sebi also extended investment restrictions to employees' family members. During an employee's tenure, neither the employee nor their family members can make fresh investments in "non-permitted investments", which include equity shares, instruments convertible into equity, and equity or commodity derivatives.

However, investments through professionally managed pooled investment vehicles regulated by financial sector regulators, as well as units of InvITs and REITs, remain permissible.

Additionally, an employee's investment in products offered by any one Sebi-regulated entity managing pooled investment vehicles cannot exceed 25% of the employee's total financial investments.

Employees joining Sebi who already hold non-permitted investments can choose to sell them, freeze them until the end of their service, dispose of them under a trading plan approved by the Office of Ethics and Compliance (OEC), or sell them with prior approval from the OEC. However, investments in equity or convertible instruments of an employee's own commercial venture can only be sold or frozen.

To address conflicts of interest, the regulations require employees to recuse themselves from matters involving a conflicted relationship. This includes situations where an employee has a material financial interest in the concerned entity, where a close friend or associate from the previous three years is involved, or where family, professional or relational interests could create actual or perceived bias.

An employee will be considered to have a material interest if the employee and family members together hold non-permitted investments exceeding ₹20 lakh (based on acquisition cost) in an entity, or if such investments account for more than 5% of the employee's total financial investment portfolio.

Where there is any doubt about whether a matter involves a conflicted relationship, it may be referred to the Office of Ethics and Compliance (OEC) or another designated authority.

Further, employees are also required to disclose any potential conflict at the earliest opportunity. Sebi will establish a digital system to record conflict disclosures and manage recusals.

The amendments significantly strengthen disclosure requirements. Employees must disclose details of their family members, relatives, professional interests during the previous three years, immovable properties, financial investments and liabilities, specified investments held by family members, and contracts for renting out immovable properties.

Employees must also disclose any negotiation or agreement for future employment within one month of the end of the month in which such negotiation or agreement takes place.

Further, any transaction in financial assets exceeding twice the employee's monthly basic pay must be reported to the OEC within one month from the end of the month in which the transaction occurs.

Regarding gift policy, Sebi said that while trivial gifts such as mementoes, souvenirs and bouquets remain permissible, employees must report gifts received from any one person if their value exceeds ₹50,000, up from the earlier threshold of ₹10,000.

The amendments also align the definition of "family members" for employees. The term now includes a spouse, dependent children (including stepchildren and adopted children), persons for whom the employee is a legal guardian and who are substantially dependent on the employee, as well as other relatives related by blood or marriage who are substantially dependent on the employee.