Adani Scandal Puts India Stock Regulators' Reputation On The Line

It looks as though the Adani Group’s attempt to wrap itself in the Indian tricolor and see if criticism bounces off the flag may succeed. If the Indian government becomes a participant in the conglomerate’s effort, however, it would be doing itself and all Indians a great disservice.

In its rebuttal to short-seller Hindenburg Research’s claims of stock manipulation, tycoon Gautam Adani’s company made its strategy clear: Hindenburg’s accusations were, said Adani, “a calculated attack on India, the independence, integrity and quality of Indian institutions, and the growth story and ambition of India.”

This is, of course, not true. Hindenburg Research is not part of a giant conspiracy to defame Adani, the Indian economy, or Prime Minister Narendra Modi. The company is a small, respected, New York-based shop of short-sellers that thinks it recognizes the signs of overvalued companies ripe for a selloff. The possibility of profit is enough of a motive — you don’t have to reach for theories about a transnational network of anti-India bankers and journalists.

Yet there is one grain of truth in Adani’s claim, and it should worry Indian policymakers. Hindenburg’s report, which describes a web of offshore shell companies engaged in possible related-party transactions, refers to investigations by the relevant Indian regulator, the Securities and Exchange Board of India, or SEBI.

The short-sellers make a strong, and possibly overstated, claim about the possible outcome of a regulatory investigation: “Offshore shells and funds tied to the Adani Group comprise many of the largest “public” (i.e., non-promoter) holders of Adani stock, an issue that would subject the Adani companies to delisting were Indian securities regulator SEBI’s rules enforced.” The report goes on to claim that the companies are still being investigated “more than a year and a half after concerns were initially raised by the media and members of Parliament.”

While this allegation may not read as an “attack” on the “integrity and quality” of Indian institutions, it does come close. It certainly raises a few questions about regulation that Indian decision-makers would do well to answer quickly and comprehensively.

One of the ways that India has successfully differentiated itself from other emerging markets — and even from China — is through the transparency of its markets, the quality of its markets regulator, and its legal protections for minority investors. Indian courts might be difficult to navigate, political risk in New Delhi and the states might be tough to manage, but the Indian equity markets are world-class.

They are plug-and-play institutions, easy for first-timers or foreigners to navigate and to trust. While we have suffered stock manipulation scandals like anyone else, the perpetrators have been caught and reforms put into place to try to prevent a recurrence.

This reputation is not something that can or should be lightly risked. The Adani Group shouldn’t be declared guilty on the basis of one report from one research group. But that report has caused the world to look closely at not just Adani but also the environment within which Adani operates. Whatever conclusion they come to about the first, it’s critical that their judgment of the second turns out positive. Otherwise, Indian companies that intend to raise money from capital inflows into the equity markets will suffer. So will Indian investors who expect those inflows to swell their returns.

It isn’t only Indian regulators who need to ensure they address these doubts head-on. This is a crucial test for India’s market economy. Policymakers in New Delhi still have extraordinary influence over the nuts and bolts of India’s economy, if in ways that are not immediately obvious to outsiders. State-run banks dominate lending to companies. The Life Insurance Corporation of India, a public sector insurer, is the most influential domestic equity investor. If it and other state-run institutions appear to come to Adani’s rescue now, without credible justification, who will believe in the future that India’s government doesn’t have a thumb on the stock-market scales?

Policy makers will have some tough choices to make. They may feel the odds are against them, and the world has turned untrusting. Consider this: We have just heard that Abu Dhabi’s International Holding Co. will invest $400 million in Adani Enterprises Ltd., the group’s listed trading house. On the one hand, this makes perfect sense for IHC, and fits with other such investments the Emirati royals’ fund has made in the past.

On the other hand, everyone also knows that the United Arab Emirates are India’s closest strategic partner. Concerns that New Delhi will call on its friends, associates and vassals to help Adani in its hour of need are hardly likely to be assuaged by this news.

India’s regulatory reputation is on the line. This is the one thing that has set us apart for three decades, since SEBI was first set up in response to our first big market manipulation scandal. It is something we as Indians should be proud of and should fight to defend — regardless of how hard one company waves the flag in our faces.