Madhabi Puri Buch: A tightrope walk of regulation, reform and innovation

Meanwhile, Pandey, before being appointed as Revenue Secretary in January, had the charge of Secretary, DIPAM. A 1987-batch Indian Administrative Service officer of the Odisha cadre, he had taken charge as Finance Secretary in September 2024 after his predecessor TV Somanathan was appointed as Cabinet Secretary. Pandey, who holds a Master’s degree in economics and an MBA, had earlier played a key role in finalising the sale of Air India as DIPAM Secretary. 

Buch started her career in 1989 with ICICI Bank and later served as CEO of ICICI Securities from February 2009 to May 2011. In her previous roles, she has handled market regulation; intermediaries regulation & supervision; integrated surveillance, investment management; department of economic & policy analysis; National Institute of Securities Markets (NISM) and IT department. 

An industry participant calls her a ‘trailblazer’ and a ‘task master’. “She had made several important changes in the capital markets which have ruffled many feathers. But that was need of the hour. As she came from a private sector background, her working style was fast-paced and [she was] told many times to slow down. Her contributions to the capital markets be it in IPOs, derivatives or a faster settlement process are noteworthy,” says the person. 

Buch holds an MBA from Indian Institute of Management, Ahmedabad, and is a graduate in Mathematics from St. Stephen's College. 

“What made her stand out as a chairperson of Sebi was her past experiences and deep understanding of the markets which wasn’t seen in her predecessors. At the right time, she had warned about the froth building up in small and midcap stocks. Now that bloodbath is a reality with lakhs of investors burning their fingers,” says a veteran market investor.

Regulations

One of Buch’s top priorities was investor protection, especially the gullible retail segment, which was queuing up at the stock markets after a super rally post the Covid-led lockdown. The number of unique individual demat holders more than tripled to 8.95 crore at the end of March 2024 from 2.82 crore in March 2019, shows a Sebi study.  

Similarly, unique individual mutual fund accounts grew to 4.42 crore from 1.91 crore over the same period. The number of total demat accounts crossed the 10 crore milestone in August 2022 and stands at 15.14 crore at the end of March 2024.

With nearly 600 orders and 200 consultation papers, under Buch’s leadership the market regulator made significant changes in the brokerage industry, mutual funds, primary markets, exchanges and intermediaries, and derivatives. These regulatory changes were made to foster growth, improve investor confidence, streamline the market mechanism and overall protect investors.

Deeply concerned about the steep losses incurred by retail F&O traders, Sebi implemented a series of measures to cut speculative trading, curb volume and thereby reduce risks. Despite multiple warnings, the high volume of F&O trade had made derivatives a gambling pit for retail traders lured by greed to make a quick buck. She had said, “F&O volume surge has now become a macro issue and not just a micro issue of investor safety”.

The market regulator implemented a seven-pronged action plan to curb high volatility in F&O trade. The plan included rationalisation of strike price for options, removal of calendar spread benefit on expiry day, upfront collection of options premium, intraday monitoring of position limits, setting a minimum contract size, rationalisation of weekly index products and increase in margin near contract expiry. 

Also read: Madhabi Puri Buch: A curious case of knots and tangles—the story so far

“She seems to be a person in a hurry. The way she introduced rapid changes in regulations, it was difficult to keep pace. Definitely not a typical bureaucrat who would take anyone’s advice,” says a veteran market participant. 

The person says that Buch has done a lot to protect investors but killed a large part of intermediaries. “Maybe to an extent it was required due to past instances, but her aggressive and rapid regulatory changes did not leave any breathing space. Small brokerages could not keep up, which ultimately led to their shutting shop. Even large brokerages could not follow the changes from day one. There was not enough clarity in the regulations,” the person says.

According to a study conducted by Sebi, 7 out of 10 individual intraday traders in the equity cash segment have incurred losses in FY2022-23. The surge in these trades was unmatchable, rising over 300 percent in the number of individuals participating in intraday trading in the equity cash segment in FY 2022-23 compared to FY 2018-19. In FY24, 92.50 lakh unique individuals and proprietorship firms trading in the index derivatives segment of the NSE cumulatively incurred a trading loss of Rs 51,689 crore, according to Sebi. This loss doesn’t even include transaction costs.

The person quoted above says that at times, Buch’s aggressive changes in the norms for trade were so rapid that exchanges themselves were overwhelmed. “If there is any delay in execution of trade due to a new and immediate change in norm,  it is the broker who is penalised always. Though these issues are resolved gradually, they could have been tactfully handled in a phased manner,” says the person. 

In primary markets, under Buch’s leadership the market regulator made several changes in initial public offerings (IPOs) which made investing in them far simpler and more efficient. In 2023, there were a few regulatory developments aimed at enhancing disclosures and market practices, including the introduction of the T+3 (trading plus three days) mechanism for IPOs. This mechanism allows companies to list three days post-closing of the issue, as opposed to six days earlier.

Primary markets have been gushing with new listings as overall equities had a steady flow of liquidity with benchmark Sensex and Nifty hitting record highs in September 2024. In 2024, for the first time, India had risen to the number one position globally in IPO volume, listing almost twice as many IPOs as the US and more than two-and-a-half times as many as Europe. 

In 2024, a record Rs 1.60 lakh crore was raised via IPOs as the highest-ever number of companies (91) went public, shows data provided by Prime Database. This is more than double the fundraise of Rs 49,436 crore through 57 IPOs in 2023. It also surpasses the previous record of Rs 1.18 lakh crore raised via 63 IPOs in 2021 as the post-Covid liquidity gush made primary markets attractive with wider retail participation. 

In October last year, the Sebi approved a slew of measures to improve investor convenience and protection. It announced the introduction of a new asset class, a faster rights issue process, an ASBA-like facility for the secondary market and tightening the norms on insider trading for listed companies. The Application Supported by Blocked Amount (ASBA) procedure provides an alternative mode of payment in issues whereby the application money remains in the investor's account till finalisation of allotment in the issue. 

From February 1, 2025, qualified stock brokers (QSBs) are mandated to provide either an ASBA-like facility for the secondary market or 3-in-1 trading account facility. Clients will continue to have an option between the two and the existing process of transferring funds to brokers. 

One of the many important changes in regulatory norms by Sebi was the mandatory Business Responsibility and Sustainability Reporting (BRSR) norms for the top 1,000 listed entities in India to make sustainability disclosures. Later, the market regulator added a set of key indicators, also known as BRSR Core, on the top 150 companies—they are expected to provide reasonable assurance as part of their annual reports by FY24. 

Making further headway in climate action is not just about meeting the earlier commitments, but also entering into swifter and stronger policy and regulatory change. Therefore,  the market regulator’s move was seen as the right move to drive companies to become ESG-compliant to attract more investor interest.

Reforms 

The market regulator made significant reform in the way trade settlement is done in India. With the real time settlement of trading a reality in India, India made a mark for itself much ahead of many matured markets globally.

Initially, the top 500 stocks were made eligible for the same-day settlement cycle (T+0) in a phased manner from T+1. The same-day settlement cycle will continue to be optional, however. Earlier in 2021, T+1 settlement was introduced in a phased manner which was fully implemented from January 2023. In order to develop securities markets and ensure investor protection, Sebi had shortened the settlement cycle from T+5 to T+3 in 2002, and subsequently to T+2 in 2003.

“There was practically no real benefit of the same day settlement of trade. T+1 day settlement is good enough for a robust market like India. What do you do by getting money on same day settlement?” says a market veteran.

Under Buch’s leadership, the market regulator made similar changes in amending the REIT Regulations 2014 by establishing guidelines for creation of Small and Medium Real Estate Investment Trusts, or SM REITs. The move was to regulate the fractional ownership industry and safeguard investor interests, incorporating both commercial and residential properties within the new framework.

Finally, Sebi’s clampdown on the growing finfluencer community was a significant move though a little late. The market regulator banned brokerage firms and fund houses from engaging finfluencers for promotion or marketing campaigns. In addition, Sebi mandated several measures to curb the menacing influence of social media on stock markets and misleading naive investors.

Also read: Why did stock markets get cold feet after the Budget?

Innovations 

Markets participants unanimously agree that Buch was data driven and extensively used technology in problem-solving processes. Under her, the Sebi stepped up its mechanisms to adopt AI-backed technologies, while tightening norms so that over-dependency on AI does not expose capital markets to severe threats. 

“She was a thorough data-driven person and her deep understanding of the regulatory bodies helped immensely. Her problem-solving skills, therefore, were scientific and accurate,” says a market investor quoted above. 

Currently, Sebi uses AI for applications such as fraud detection, risk assessment, and customer service enhancements while planning to hasten the process of IPO approvals using AI. Sebi’s Virtual Assistant (Seva)—an AI-based conversation platform for investors—provides general information about the securities market, the latest master circulars, and the grievance redressal process. 

While acknowledging that AI tools have proven to be useful for summarising and analysing data and boosting efficiency, Sebi has proposed more disclosures by investment advisors (IA) and research analysts (RA). In August, it proposed that an IA/RA who uses AI tools for servicing clients must provide complete disclosures to them regarding the extent of the use of such tools. 

Sebi has also stressed that the “responsibility of data security, compliance with regulatory provisions governing investment advisory services/research services lies solely with the IA/RA, irrespective of the scale and scenario of IA/RA using AI tools”.

Knots and Tangles

Helming one of the world’s largest stock markets in the world, Buch’s challenges were undoubtedly steep from the beginning. However, a series of allegations hurled against her made the task far more complicated, raising several questions around governance, transparency, integrity and credibility—not only Buch’s, but also of the market regulator. 

Last year, US-based Hindenburg Research (now defunct) had issued a statement accusing Buch of conflict of interest in Adani Group and the regulator’s investigations in it. Though both Sebi, and separately Buch along with husband Dhaval Buch, have denied all the allegations made by Hindenburg Research and the opposition Congress party, the allegations were a direct attack on the integrity of Sebi. 

The accusations were serious, raising doubts and suspicion on its capabilities, competencies and effectiveness. 

Coincidentally, Buch had taken over as Sebi chairperson at a time when the market watchdog was under scrutiny over its handling of the National Stock Exchange (NSE) case and lapses around it between 2010 and 2015. Buch isn’t the only Sebi lead to have been embroiled in controversies. CB Bhave (2008-2011) moved to head Sebi from the National Securities Depository Limited (NSDL), raising questions on conflict of interest in the case against NSDL, from which he later recused himself. 

UK Sinha (2011-2017) faced public interest litigations on charges of his Sebi colleague alleging that he was pressured by the government to go soft against high-profile corporates. 

Meanwhile, during her tenure, ‘employee discontent’ charges against Buch also cropped up. On August 6, 2024, Sebi employees had reportedly written a letter to the finance ministry, expressing their concerns about “toxic work culture”, while putting forth other demands. On September 4, Sebi had issued a statement rebutting allegations of employee mistreatment, which was followed by a protest by employees demanding the resignation of Buch. Sebi had said that the complaints of the employees were influenced by external elements. 

In another twist, on September 16, 2024, Sebi withdrew its earlier press statement, saying it was amicably addressing the concerns of protesting employees on “internal” matters. 

However, in Buch’s own words, in her address at the IIM-A convocation, “I am afraid I have a long list of colleagues as well as bosses who would testify to the fact that I am not only a very difficult boss to work for, but also a very difficult subordinate... because I just won’t give up... until a problem has been dissected to the last degree.”

New Sebi Chief: Task at hand 

One of the key tasks at hand for new chairman Pandey will be perhaps to make a decision on the long pending rationalisation of the total expense ratio (TER), or the expenses that mutual fund (MF) schemes can charge their investors. Sebi has deferred its decision on TER several times.

A market veteran also expects a softening of postures by the new Sebi chief. “A bureaucrat will bring that change. There are no major relaxations expected but we hope the new chief gives some breathing space to brokers. Otherwise, being pro-investor has become fashionable, wherein the investor is seen as the holy cow that needs to be protected despite his greed,” the person adds.