Protect Indian Investors
Buoyed by the surging sentiments on India and Indian economy, strong growth and updates of India Inc and rising optimism over global cues, close on the heels of glorious success of our Chandrayan-3 mission and global accolades on spectacular G-20 meetings, Indian markets are touching new peaks. The BSE Sensex has recorded its longest gaining streak since 2007, adding Rs 14 lakh crores in just 11 sessions. Even on days when foreign investors book profits and pull their money out, domestic investors and mutual funds keep the markets buoyant.
Famed US investor Peter Lynch in his celebrated ‘20 golden rules for investing’ opined that ‘you (investors) have to know what you own, and why you own it?’ True to this, investors rely on their perception and the public domain information to make investment decisions. At any point, a stock is awarded higher valuations if investors have confidence in the company and its management. A consistent year-on-year price growth is thus a strong indicator of the market’s trust. It can be reversed only due to a black swan event, economic meltdown, or a material event outside the company’s control. Similarly, a ploy, a concerted effort, or a criminal meddling may act as a reversing factor.
Recent events concerning the Adani Group are an example of the above. The release of the Hindenburg Report in January and another one by the Organized Crime and Corruption Reporting Project had led to a significant value erosion for Indian investors. As per the report of the Hon’ble Supreme Court appointed Committee, the maximum loss for Indian investors between January 24 and February 27 was approximately Rs. 29,200 Crores. The Committee submitted its first report while the SEBI is investigating other matters including the role of foreign portfolio investors. SEBI informed the Hon’ble Court that it is awaiting information from five tax havens. The matter is fixed before the Court on 13th October.
According to earlier media reports, the Enforcement Directorate (ED) had concluded, after a preliminary investigation into the Hindenburg Research report and the subsequent market crash, that a dozen companies including foreign portfolio investors and foreign institutional investors (FPIs/ FIIs) based in tax havens were the “top beneficiaries” of short selling in shares of Adani Group companies. According to the Report, the Enforcement Directorate told the SEBI in July that some of these short sellers allegedly took positions two-three days before the Hindenburg report was published on Jan. 24. The report said that three of the 12 short sellers are based in India, adding that one is the Indian branch of a foreign bank. Four are based in Mauritius and one each in France, Hong Kong, Cayman Islands, Ireland and London.
This series of events presents an interesting picture. There are elements interested in rocking the boat aimed at making a kill, at the cost of market investors. On the other hand, there are other investors like GQG Partners and Qatar Investment Authority who continue to have confidence and trust in the Group’s business and made strategic investments. While some investors and at certain times the market remain bullish notwithstanding, the seriousness of allegations against the Adani Group and the surrounding market backlash needs a better analysis. If the allegations are indeed proven, then action by the regulators and government is bound to follow. If there is no adverse conclusion, then the real intention of those interested agencies with their motives would be brought in open needing suitable regulatory correctives.
Finance Minister Nirmala Sitharaman in a recent interview highlighted the role of SEBI in addressing issues of manipulative actions like short selling. She expressed that effective use of regulatory tools could contribute to enhanced corporate governance, which benefits India's economic landscape.
While the matter may reach its logical conclusion after consideration by Hon’ble Supreme Court, an important fact needing strong emphasis is that these developments significantly impact retail investors, market sentiment, and the economy. While freedom of expression entails that the stakeholders should be entitled to articulate their opinions, they must do so with a sense of responsibility considering the ramifications on the markets and common investors and avoid breaking their trust and confidence by external factors.
Misinformation and rumors can shake the confidence of investors, disrupt the markets and the broader economy. It may lead to misguided or nervous exits, causing extreme volatility and loss of faith in the institutions. Domestic and foreign investors may follow suit, becoming hesitant to commit long-term capital when India needs it to fuel its growth.
Continuous speculation erodes investor confidence, who may question the market’s integrity and stability by unwarranted sensation in some instances. If recent events are any guide to the market’s strength, there is a need to act swiftly to protect the stakeholders.
With the economy doing so well on all fronts, and India firmly poised to emerge as the third-largest global economy, it is imperative that rumors are not allowed to be the chinks in India’s economic armor. Regulators, institutions, government, and courts must promptly and effectively intervene in the interest of stability and resilience of the Indian markets so that matters attend finality and investors move ahead.
India has an established and widely respected rule of law, strong and vibrant institutions with credibility and public trust. Disruptions and uncertainty can hinder India’s progress toward becoming a vibrant, developed, and progressive economy. These matters must be looked at from the perspective of legality, public interest, and effective regulatory surveillance to ringfence the markets from being rocked by unscrupulous elements, safeguarding the interest of common investors.
(*Dhanendra Kumar has been India’s Executive Director in the World Bank & first Chairman of Competition Commission of India. He is currently Chairman of Competition Advisory Services (I) LLP)
