An Indian 'Conflict of Interest' Dodd-Frank To Gauge Your Bonus

PTI reports a rather vague piece on SEBI trying to restrict conflict of interest by a new set of norms to check ‘conflict of interests’ in the stock market.

The missing area which SEBI seems to bring under regulation is conflict of interests by associated market entities such as research analysts, investment advisors and employees of market intermediaries, etc, which are are not registered and regulated by SEBI at present.

The new rules would also look at discouraging misaligned employee incentives – a practice prevalent among the capital market entities for rewarding their staff purely on the basis of business generated by them and irrespective of the interest of customers or investors being safeguarded.

(I suppose they are saying if you are in a Widget A manufacturing business, you dont sell faulty, bad quality widget A's to your customer, but if you are a banker/equity guy, you shortchange them to generate your sales)

The new rules are supposedly under the guidance of IOSCO.

IOSCO is recognized as the leading international policy forum for securities regulators. The
organization's wide membership regulates more than 90% of the world's securities markets in more than a 100 jurisdictions to which India was invited in 2009.

The mechanics is that the 'Technical Committee' issues guidelines based on it’s experiences in home markets, which other regulators would apply in their regulation.


It puts up it’s consultation papers which are generic, like this one on ‘Conflict of Interest in Private Equity’.

However much I tried to look for any ‘conflict of interest’ consultation paper on employee incentives I could not come up, atleast since the time India was invited.

The new SEBI rules, to be called “Guidelines for dealing with conflicts of interest in securities market” would try to prevent following kinds of loots.

'insider trading, front-running and misaligned employee incentives. Such motives could be achieved through bad financial advice, inappropriate margin lending, misleading disclosure and reporting, front running and front loading, among others.'

FirstPost adds further:

The new norms would also focus on active involvement of senior management of market participants, adoption of clear and concise policies, adequate disclosures, information barriers and effective corporate governance procedures.

At the employee level, the focus would be on remuneration to commensurate with the job functions, maintaining record of activities and specific prohibitions, among others.

I hope SEBI would put up Draft Regulations for discussion and public comments. We would like to see the parts dealing with 'Fat-Cat-Bonus-Tax' & how a formula for employee remuneration looks like.