US-based short seller Hindenburg Research has released another report. The earlier one in January 2023, exposed the extensive financial manipulations by the Adani group. This one though related to the earlier one focuses on the possible nexus between the Securities and Exchange Board of India’s (SEBI’s) chairperson, Madhabi Puri Buch, and the Adani group. It points out that while SEBI has issued it a show cause notice in June 2024, it has not investigated the wrongdoings of Adani group.
The latest report gives a plausible reason for why this may be so, with whistleblower documentary evidence presented in the report to prove its point.
The SEBI board, some brokers, investors, lawyers and corporates, including Adani have come to the defence of the chairperson. She has presented her defence, suggesting that a) the money invested abroad was out of the savings from working abroad, b) she has not invested in Adani companies, c) she has been transparent about her financial dealings.
The ruling party, though not an accused, immediately came to her defence. This due to the closeness of the party leadership with industrialist Gautam Adani. If the SEBI chairperson gets implicated, then the matter of wrongdoing by Adani, which at present is dormant, would get reopened. The earlier accusations against the Adani group were buried after the Supreme Court pronouncements based on the clean chit by the expert committee it set up.
To understand why even weak links in the financial world matter, it is necessary to appreciate the complexity and the secrecy involved in financial manipulations indulged in by businesses.
Financial architecture helps opacity
The suggestion of a possible link between Buch and the Adani group, however weak, points to a conflict of interest. This undermines the credibility of SEBI’s actions in the Adani matter. The Supreme Court-appointed expert committee based its observations largely on the basis of SEBI’s observations. Since they have come under doubt, the credibility of the expert committee’s report also gets undermined.
Buch should have revealed her link with the Adani group to the Supreme Court as well as the public and recused herself from the case. Even if the link was in the past and in her personal capacity, before she joined SEBI, it was a reason for recusal.
After all, SEBI expects the financial institutions it supervises to follow strict norms. Following the dictum ‘Caesar’s wife has to be above suspicion’, the SEBI chief had to be spotless. This is necessary because the world of finance designs complex systems to hide its trail of wrong doings. Innumerable ways are available for the purpose, like, havala, shell companies, layering and more recently cryptos.
In the world of finance, past, weak and obscure links point to relationships hidden behind a veil of secrecy which is used to hide the real financial status and any possible illegality.
Also read: After Hindenburg Allegations, SEBI Chief’s Blackstone Connection Raises New Questions: Report
International financial architecture has been created for opacity to thwart official investigations. Tax havens are used both for their low taxes and for the promise of secrecy. So, even if the returns are low, businessmen are assured that they will not be caught. Names of Indians holding money abroad have neither been revealed under the Double Taxation Avoidance Agreements (DTAA) with 87 countries nor Tax Information Exchange (TIE) treaties with 37 nations. These have come from stolen data from tax havens. Like, from Liechtenstein, UBS Geneva, British Virgin Island, Paradise and Panama.
Nested companies in Bermuda or Mauritius are often a part of a chain for transfer of illegal funds. The SEBI chief and her husband, Dhaval Buch, putting their savings in a company that had Vinod Adani as a major depositor is suspicious. Such companies do the bidding of their major depositors and it being helmed by Dhaval Buch’s friend is no guarantee of clean business. The deposit in such a company could have been with the motive of building links with powerful people for future benefits.
In that case, the deposits being made prior to the appointment(s) in SEBI is immaterial. The links may have helped land key appointments in India. All this needs full investigation.
Cronyism
Top appointments neither in the public nor in the private sector are based solely on merit. The pliability of the appointee and the knowledge that the person would not only do the bidding of those at the top but would not rock the boat when trouble arises, is crucial.
This is the case with public sector top appointments, especially in the financial sector. Chairpersons and directors are trusted people who should not have a straight spine. In fact, climbing the ladder, the smart imbibe the art of playing the system. Today, few have the integrity to give precedence to the rule of law over their self-interest. Such people are hard to find even in the bureaucracy and the judiciary which have considerable autonomy.
Watch: ‘Zero Credibility in SEBI’s Hindenburg Response’: Sucheta Dalal
The Adani group of companies is a favourite of the current regime. This has enabled them to acquire profitable assets, easily obtain bank loans and crucially, their manipulations listed in the first Hindenburg report have gone un-investigated. Red flags had been raised six months earlier by some financial institutions.
Cronyism, the nexus between businessmen and politicians, enables the former to have their people in key positions in financial institutions and the bureaucracy. This gives them protection.
Political moves
The opposition has demanded both, an impartial enquiry and a Joint Parliamentary Committee probe into the matter. The Bharatiya Janata Party (BJP) has strongly opposed these demands. The opposition has even said that the Supreme Court should take suo motu note cognisance of the new exposés since the SEBI report may not have been fair if Buch had (even weak) links in the past with the Adani group. She neither mentioned this to the Supreme Court nor recused herself. Any number of judges recuse themselves from hearing cases if they had a link with one of the parties before they became a judge.
To divert attention from the allegations against Adani and his links with the leadership, the ruling party has said that foreign powers and the opposition are trying to derail India’s rise as a world power. In this context they often name Hungarian-American billionaire George Soros.
The reality is that India is way behind the US and China in both world economic rankings and military power. We are heavily dependent on them for technology and trade. Further, the USA has been building a strategic partnership with India to thwart China. So, why would the US want Soros to destabilise India? Regarding China, the more damaging aspect is the $85 billion trade deficit with them which reflects our dependence on them.
Clearly, if there is any destabilisation, it is internal and not external.
Stock market impact
If the stock market was impacted strongly by the revelations in January 2023, it was due to the expose of the ongoing manipulations. Short selling is a legitimate activity which helps bring down the stock prices from their stratospheric levels to their real value. This does not necessarily destabilise the market.
The overvaluation was apparent in the very high price-to-earnings (P/E) ratio of the Adani companies. For most companies this ratio is in the range of 15 to 25 but for some Adani companies this ratio was 100 and 200. Such high priced shares create the risk of a fall in share prices and the markets.
This extraordinary high value of Adani shares should have been investigated by SEBI. Other exposes by Hindenburg were OF related party investments and public holding and funds coming from abroad. The subscription of the follow-on public offer (FPO) in January 2023 also points to manipulation. Why would investors subscribe to the FPO when the share was available at a lower price in the market, subsequent to the Hindenburg expose? The subscription by big businessmen on the last day of the FPO showed the clout of Adani group.
The recovery of the Adani stock prices after their steep decline in early 2023 is another example of financial clout. Funds could be arranged. Now, after the second report, the stock market was hardly impacted. Possibly, public financial institutions were told to cushion the fall.
It has been argued that the decline in the stock market leads to losses for investors and puts off foreign investors as the country’s reputation suffers. But the unduly high valuations make the stock market into a casino and risky for small investors. The stock markets are controlled by less than 1% of the population. They are the big gainers and losers when the markets rise and fall.
The undue rise in the stock market affects real investments in the economy and bank deposits. If a 20% return can be made quickly, why invest in real factories that take time to set up and turn a profit? For the same reason, bank deposits earning 7% become unattractive. As banks struggle to raise deposits, they slow down lending, especially to small investors.
Foreign direct investment in 2023-24 is variously estimated at 5-7% of the total investment and not that crucial to the macro economy. It is the internal investment that needs to increase but that is being set back by cronyism which is scaring away investors who worry about being forcibly acquired. Consequently, rather than investing they are leaving the country.
Conclusion
The Hindenburg report pointed out that short selling in Adani stocks was due to cronyism and stock market manipulations. That is what is spoiling the investment climate, not the exposés by Hindenburg reports. The reports pointing to the illegalities are offering a chance to clean up and put the market on a healthy footing. This requires a clean slate and for that the SEBI chairperson should step aside, at least, for now.
Another court monitored enquiry would have the same limitation as last time. A JPC is needed to expose the manipulations due to the international financial architecture, cronyism and machinations in the stock markets.
The ruling party is unlikely to agree to a JPC unless the opposition presses hard both in parliament and outside. While the previous three JPCs had little impact, this one could be more successful if the public understands the link between Hindenburg reports and their issues of concern – unemployment, inflation and inequality.
Arun Kumar is the author of, the Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead.
