SEBI Changes Employee Ethics Rules; Staff Must Exit Or Freeze Non-Permitted Investments

The Securities and Exchange Board of India (SEBI) has revised its employee code of conduct. Under the new rules, employees must sell, freeze or submit a clear plan to exit investments that are not allowed under the regulator's ethics policy.

A gazette notification issued on 11 July lays out the new requirements. Employees joining SEBI will have to sell restricted investments, freeze them, or share a time-bound plan to exit those holdings. Existing employees with such investments will also get a fixed timeline to either sell or freeze them.

Dealing With Non-Permitted Investments

At the heart of the changes is a new definition of non-permitted investments, which covers equities, instruments convertible into equity, and derivatives in equity and commodities.

New employees joining SEBI must either liquidate these holdings, freeze them for the duration of their service, or submit a time-bound trading plan to the regulator's Office of Ethics and Compliance for disposing of them.

Existing employees will be given a specified timeline to choose one of these three options. Those who neither sell nor freeze their non-permitted holdings after the prescribed period will face restrictions: they will not be permitted to vote as shareholders, receive corporate action benefits, or subscribe to rights issues on those holdings while in service.

The restrictions extend to specified family members of SEBI employees, though certain exemptions apply. Shares acquired by a spouse through an employee stock option plan will not be treated as non-permitted investments. Where technical violations occur because of inadvertent actions by a spouse or dependent family member, these will not count as misconduct affecting the employee's career, though a monetary penalty may still be applied in appropriate cases.

Investments made through professionally managed pooled vehicles regulated by a financial sector regulator, as well as units in InvITs and REITs, are also excluded from the non-permitted category.

Wider Disclosure Requirements

The revised regulations expand what employees must disclose both on joining and on leaving the regulator. This now includes financial investments and liabilities of the employee and their family members, details of non-permitted investments, and professional interests from the preceding three years.

Any negotiations for future employment must be disclosed within 30 days. Changes in family details, rental agreements, and immovable property transactions must also be reported within the same timeframe. Gifts from friends valued above ₹50,000 received on occasions such as weddings must be reported as well.

Post-Service Restrictions

SEBI has also added a new rule for employees after they leave the organisation. Former employees will now have to observe a two-year cooling-off period. During this time, they cannot appear before the market regulator or represent anyone in matters involving SEBI.

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