SEBI's Investigation Unveiled
SEBI has heightened its focus on market manipulation and insider trading, leading to a recent case involving Bank of America’s India unit. The regulatory
body’s scrutiny revealed alleged violations of insider trading regulations, implicating nineteen individuals. Among those accused were seven individuals who traded using privileged information, and four who shared this information. The investigation also targeted eight executives from PwC and EY for shortcomings in their compliance procedures. Furthermore, SEBI accused executives from US private equity firms, Carlyle Group and Advent International, of improperly sharing unpublished price-sensitive information about a deal, which is a violation of insider trading rules, as per the review of the notice conducted by Reuters. The investigation stemmed from a 2022 share sale by Yes Bank. These actions signal SEBI’s commitment to upholding market integrity.
Breaches at EY and PwC
The regulatory notice reveals that current and former executives at EY and PwC's Indian branches are accused of insider trading related to a 2022 share sale by Yes Bank. SEBI determined that executives from both firms had breached confidentiality rules, permitting specific individuals to trade Yes Bank shares before the capital raise. The notice highlighted EY’s failure to include Yes Bank on a comprehensive 'restricted list'—a list of companies where firm executives were prohibited from trading. While individuals directly involved in the deal were restricted, others with access to sensitive data were not, according to the notice. Rajiv Memani, EY India’s chairman and CEO, along with the firm’s chief operating officer, have been asked to justify why penalties should not be imposed. SEBI's probe emphasizes the importance of robust internal controls.
Weak Compliance Protocols
The investigation also exposed weak compliance protocols at both PwC and EY. In PwC’s case, SEBI noted the absence of a 'restricted stock list' for advisory and consulting clients. The notice also stated that PwC’s internal rules required employees to report both the initial purchase and sale of company shares. SEBI pointed out that this practice facilitated the omission of later trades in the Yes Bank case. Arnab Basu, PwC’s Chief Industries Officer in India, and two former executives have been asked to respond for failing to establish an adequate code-of-conduct framework at the firm. EY's compliance failings, including the inadequate 'restricted list', enabled potential misuse of insider information. Both Memani and Basu, who have not been accused of wrongdoing by the regulator, did not respond to requests for comment sent to their company spokespersons. The regulator’s scrutiny underlines the importance of robust compliance measures to prevent insider trading.
The Yes Bank Deal Context
The SEBI investigation focused on the share movements of Yes Bank before a July 2022 share offering. Carlyle and Advent purchased a combined 10% stake for $1.1 billion. The share price of Yes Bank increased by 6% the day after the deal was made public on July 29, 2022. Prior to the share offering, Advent sought tax advice from EY and feedback on Yes Bank’s management. Simultaneously, EY Merchant Banking Services was contracted by Yes Bank for valuation work. At around the same time, PwC was hired by Carlyle and Advent for tax planning and due diligence. The notice, issued in November and not previously reported, suggests that executives at PwC and EY, along with five family members and friends, profited unlawfully through trading in Yes Bank shares before the 2022 share offering. It is understood that most of the accused individuals are still employed at their respective companies. The notice further stated that executives from Carlyle, Advent, PwC, and EY, as well as a former Yes Bank board member, shared unpublished price-sensitive information, allowing others to trade on it.
Potential Consequences
The show cause notice is the initial step SEBI takes after an investigation, and it solicits responses from the accused parties. If the allegations are substantiated, those involved could face financial penalties or restrictions under Indian securities laws. This regulatory action represents a rare instance where senior executives from consulting and private equity firms have been accused of insider trading violations related to a capital raising deal. The increased focus on market integrity aligns with the growing trend of Indian companies raising more capital and the attraction of global investors looking to diversify investments, particularly due to growing geopolitical tensions. The accused parties, along with their respective companies, are preparing their responses to SEBI’s notice, as indicated by sources familiar with the matter. This case underscores the seriousness with which SEBI is approaching insider trading and its commitment to safeguarding the interests of investors and the market.
