Regulatory independence

Courts should not worry about financial market volatility

The Supreme Court has put the Securities and Exchange Board of India (Sebi) in a difficult spot. The court last week constituted a high-profile committee, headed by former Supreme Court judge Abhay Manohar Sapre, “to provide an overall assessment of the situation including the relevant causal factors which have led to the volatility in the securities market in the recent past”. The committee, which includes former State Bank of India chairman O P Bhatt, Infosys co-founder Nandan Nilekani, banker K V Kamath, retired judge J P Devadhar, and securities law specialist advocate Somasekhar  Sundaresan, is further expected to assess whether there were regulatory failures in the context of the alleged violation of securities market laws in relation to the Adani group or other companies. It would also be expected to suggest measures to strengthen the regulatory framework to protect Indian investors.

Irrespective of what has happened in Adani group stocks in the recent past, there is surely scope for improvement in the regulatory framework, but this is not the best way to approach the matter. As a matter of fact, Sebi has been working on improving the governance framework and has itself constituted expert committees in the past. The regulator was investigating different aspects of allegations levelled by US-based Hindenburg Research, which had short positions on financial instruments related to the Adani group. The Supreme Court in its order has noted that Sebi should also investigate whether there has been a violation of Rule 19A of the Securities Contracts (Regulation) Rules, 1957, by Adani group companies — further, if there has been any stock manipulation and whether related-party transactions were not reported in accordance with the law and regulation.

Since Sebi has been investigating the matter, it is not clear how constituting an expert committee will help. The committee could actually end up undermining the regulator’s position. It will anyway depend largely on the regulator for information. Since Sebi is in the process of looking into the allegations, it is unclear how the committee will arrive at any conclusion till the investigation is over. In terms of strengthening the regulatory architecture, the securities market regulator is adequately empowered.

At a broader level, while it can be argued that the regulator should have been more proactive in looking into sharp run-ups in the Adani group stocks, along with their shareholding patterns, there was no case for the court to intervene and constitute a committee to look into the matter. Although it is correct that the Adani group stocks have lost market value worth over ~10 trillion, retail and mutual fund holdings in these counters were fairly limited. Further, there was no contagion and stock markets are functioning perfectly. Volatility is inherent in financial markets, and prices are discovered by a large number of investors taking positions simultaneously. Even in the stocks in question, investors should have known the downside risks while buying them at such lofty valuations. If there has been some wrongdoing, the regulator is duty-bound to investigate. However, there is no way or need to protect investors from volatility. Some of the large tech firms in the US, for instance, lost over 50 per cent of their market capitalisation in 2022 as market conditions changed. This is how markets function.