The report released by Hindenburg Research alleging stock manipulation and accounting fraud against one of India’s largest conglomerates calls for an immediate and broader debate on market regulation. The report by the New York-based short seller has led to a steep downfall in the Adani Group’s domestic shares and its bonds overseas are being sold off rapidly.
Reports suggest that SEBI has begun its investigation into the matter and the RBI has called for details from banks regarding their exposure to the Adani Group. The S&P Dow Jones Indices has removed Adani from the sustainability indices while the National Stock Exchange has placed the Additional Surveillance Measure (ASM) framework on shares of three Adani companies.
Questions arise: Is this a regulatory failure? If so, who is to blame? Are there gaps in the market regulatory framework? How do we fill those gaps? How do we ensure that public money is invested prudently?
In other words, could SEBI or the RBI have prevented the depression in the stock value of the Adani Group? Were the checks and balances adequately supervised? Are the current procedures, vigilance and enforcement mechanisms good enough? Only a Joint Parliamentary Committee, which investigates all aspects of market regulation as well as the irregularities alleged by Hindenburg Research and forcefully rebutted by the Adani Group, can answer these questions.
In 1992, a JPC was set up to investigate irregularities in securities and banking transactions. It presented its report to Lok Sabha on December 21 1993. In 1992, allegations of financial irregularities provoked a record 570-point fall in the Sensex. It resulted in SEBI being accorded statutory status in 1992. The mandate of the Committee, consisting of 20 members from Lok Sabha and 10 from Rajya Sabha, involved inquiring into all aspects of irregularities and fraudulent manipulation and the role of banks and other financial institutions in the transactions. It was tasked with fixing responsibility — individual, institutional or regulatory — for the irregularities that took place in the market.
The Committee identified loopholes and recommended safeguards. A large part of the progress made in market regulation is down to the forensic analysis conducted by the 1992 JPC into the failures of market regulation.
In 2001, another JPC was ordered to look into the share market irregularities of Ketan Parekh. The Madhavpura Mercantile Cooperative Bank had allegedly colluded with Parekh to issue pay orders without being backed by requisite funds. The JPC Report pulled no punches. It said “the present scam includes the role of banks, stock exchanges, brokers, the Unit Trust of India (UTI), corporate bodies and chartered accountants”. It laid bare the lax regulatory framework governing markets and the failure of institutions tasked with regulatory oversight. It excoriated authorities like SEBI, RBI and Department of Company Affairs (DCA) who “should have been able to lay down and implement guidelines and procedures that could prevent such a scam or at least activate red alerts that could lead to early detection, investigation and action against fraud”.
It is nobody’s case, and not in the least this author’s, that the allegations leveled by Hindenburg Research are true. In fact, the holistic rebuttal by the Adani group has to be fairly juxtaposed against hitherto statutorily unverified assertions made in the report to arrive at the truth. It is therefore imperative that the Indian people know the reality of these allegations or otherwise through an impartial parliamentary inquiry.
It is quixotic if not perplexing that notwithstanding the 413-page rebuttal from the Adani Group, India’s stock market continues to be so volatile, if not an unwitting hostage to a report by a research group based in the US but more or less unknown in India. There are therefore deeper systemic issues that need to be addressed.
First, the present saga has exposed the quality of governance and practices followed in the market. While on paper much has changed since 1992 and 2001, in practice the system has not functioned properly. A reduction in value by $108 billion raises a simple question: When these stocks were rising, why was there a general lack of concern from regulators to see whether the rise was in consonance with market fundamentals and not the result of adventurist speculation? Had such diligence been done by regulators, a relatively unknown short seller’s report could not have resulted in a bloodbath on the stock market.
Second, the RBI must also receive censure for any regulatory laxity as far as banks are concerned. The RBI is responsible for overseeing lenders and ensuring that the banking system is sound. Were banks questioned regularly as to their dealings? Were inspections and observations carried out? It was only on February 2 that the RBI asked banks for information on their exposure to the Adani group, a full nine days after the Hindenburg Research report came out.
Indeed, if past regulatory failures are anything to go by, the RBI must answer as to why it did not advise banks to exercise prudence while providing large loans. Take the Rs 11,000 crore Punjab National Bank fraud case in which the RBI was found wanting. It could not detect the fraud, respond adequately to red flags, and failed to properly oversee operations of the nation’s second-largest state-run bank.
It is important to underscore that this piece, or indeed the larger discussion on financial and market oversight, is not a witch hunt against any promotor or corporate group. The larger question is how could a report by a virtually unknown entity impact the market valuations of one of India’s largest conglomerates so deleteriously. Serious questions have also been raised in the public space about the intent of the Hindenburg report. Could it be connected to the larger geo-politics at play, especially given the fact that the strategic landscape is transforming very rapidly? A new history to which all of us are witnesses is being scripted.
Above all, it is an opportunity for the country to strengthen its regulatory mechanisms to prevent future market failures. As Indian companies go global and global investors invest in India, our regulatory system must be sufficiently robust to meet attendant challenges. For this, a JPC that debates the various aspects of market and financial regulation is a necessary first step to improve our regulatory and oversight mechanisms. It is therefore not a political demand but an oversight and regulatory imperative that Parliament must respond to.
The writer is a Congress MP, lawyer, and former I&B Minister. Views are personal
