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Hindenburg-Adani saga: Supreme Court’s Expert Committee finds no regulatory failure — so who caused disruption in Indian markets?

The Expert Committee appointed by the Supreme Court to look into the allegations raised by the Hindenburg report and determine whether there was regulatory failure in dealing with the alleged contravention of the law, among other things, has submitted its report. The report has examined the entire matter in depth on various issues like an assessment of the factors that led to volatility in the markets, whether there was regulatory failure in disclosures, and price manipulation among others. It has not found any regulatory failure and this point itself deflates the entire narrative that sought to disrupt Parliament and cast aspersions on the regulations dealing with the Indian capital market.

The report states that the Indian market was not unduly volatile, though the Adani group’s stocks showed an increase in volatility after the release of the Hindenburg report. This, in a way, shows the maturity of the Indian investor who refused to get caught in the political mudslinging and maintained composure during difficult times. The committee has mentioned that the allegations made by the report were inferential and based on publicly available information. This raises a larger question of why the entire issue was given a political colour without an adequate understanding of the matter or even an inquiry being completed.

Such an effort to score political brownie points put the entire reputation of the Indian capital market at risk at a time when it was an island of stability across a troubled world. The report mentions steps taken, like the action by the Adani group to pare down debt and the infusion of new equity investment by a private investor, that has led to an increase in confidence in the stocks. This is also shown by the stocks, which are stable at newly priced levels and data also shows that retail investors have increased exposure to the companies after January 24, 2023.

The committee has looked at data which show retail investors participating in large numbers in the futures and options segment, but with nearly 90 per cent incurring a loss. It wants increased levels of financial literacy, because it is as important as national security, and wants financial literacy to be included in the school curriculum. This has become a vital point as investors increasingly need to understand how incorrect information or interpretation can cause turmoil in the capital markets impacting their hard-earned money. There is also a huge amount of funds that are lying unclaimed by deceased persons and it has proposed setting up a Central Unclaimed Property Authority which will help investors to reclaim their various amounts.

The issue of minimum public shareholding depends on whether 13 foreign entities as mentioned in the report are compliant with disclosures of their beneficial owners as per the law. The foreign portfolio investors in question have made declarations identifying their natural owners controlling their decisions. In addition, the requirement to disclose the last natural owner was done away with by SEBI in 2018, but still it has been investigating the said entities since October 2020. This dichotomy has led to SEBI drawing a blank in its investigations. Based on this the committee has decided that it is not possible to determine regulatory failure.

The definition of the terms ‘related party’ and ‘related party transactions’ is also of critical importance. SEBI has substantially amended these terms in November 2020 with the impact of the changes coming in with prospective effect at later dates in stages. Since the market regulator has undertaken this step, the feasibility of testing the principles underlying the regulations governing related party transactions has been eroded.

Concerning the issue of price manipulation in Adani stocks and their artificial inflation, SEBI has an automated system that throws up data considering various factors including the concentration of net buyers/sellers, whether some entities traded among themselves, whether profit or loss was made etc. In the case of Adani stocks, 849 alerts were generated and various reports came out both prior to and after the release of the Hindenburg report. However, no pattern or artificial trading among the same parties was found. Again, allegations were made about public institutions like Life Insurance Corporation, which had invested in these companies, without any basis. Some of the investments are automatic due to their inclusion in passive products, since some of the Adani group companies were part of the main indices. But the danger is that casting aspersions on financial decisions without proof can impact the confidence of markets and consequently the value of the investments.

Overall, the report brings out the facts clearly. There was no regulatory failure. But it also brings up a larger issue, which too needs an independent investigation.

This investigation needs to go into the events that were triggered by the Hindenburg report and find out who was instrumental in bringing this about. The impact has been huge because not only did the fall and uncertainty in the capital markets hurt investors financially but even Parliament was stalled. Legislative work was held up and this led to a waste of public money. At a time when the country is on the path of growth, and considering its stature around the world, these kinds of disruptions need to be avoided.

The writer is a member of the BJP and former Union Railway Minister

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