Hindenburg 2.0: Sebi must fix two systemic issues to strengthen processes

The episode has raised two issues that must be addressed - first, of stock manipulation and violation of public shareholding norms via offshore funds, and second, disclosure norms for decision makers

US-based short-seller Hindenburg Research has made fresh allegations in the Adani Group matter in the past few days. And its target this time have been securities market regulator Securities and Exchange Board of India (Sebi) and its chairperson, Madhabi Puri Buch. Hindenburg has questioned Sebi’s objectivity in the Adani probe and alleged Ms Buch is a conflicted party because she and her husband Dhaval Buch invested in one of the funds that is said to have been used for pumping money into Adani shares. It has further alleged that the regulator is promoting real estate investment trusts because of Mr Buch’s association with a large private equity firm that has significant exposure in the Indian real estate market. There have also been other allegations like the Sebi chairperson owning a consultancy firm, suggesting conflict of interest.

 

Sebi and the Buchs have issued separate statements and answered the issues raised by Hindenburg. Predictably, given the parties and stakes involved, these might not satisfy everyone. Opposition parties, for instance, have renewed their demand for a Joint Parliamentary Committee probe into the matter. A fresh petition has also been filed in the Supreme Court. It is worth noting that the Supreme Court had heard the matter and, in January this year, rejected the charge that Sebi was not doing enough to probe the issue. It had noted that the regulator completed the investigation in 22 out of 24 issues. In its latest response, Sebi has said it completed one more area of investigation in March, and the only one remaining is nearing completion.

 

While the closure of the issue will take time, the entire Hindenburg matter has raised at least two important systemic issues that must be debated and addressed. First, the biggest among the allegations is that of stock manipulation and violation of public shareholding norms through offshore funds. Sebi has thus far not shown if this is true or false. This reflects a serious shortcoming on the part of the regulator of one of the world’s biggest stock markets. However, it has tightened the disclosure norm for foreign funds — those exceeding certain limits have to disclose economic beneficiaries and ownership. If the regulator had been in a position to refute the allegations quickly, with facts, it would have sent a strong message to the market.

 

The second issue is related to the chairperson and other key persons in decision-making positions. Sebi has argued that it has a robust mechanism for disclosures. To strengthen the disclosure norms for key persons, and to quell any speculation in the future, the regulator should consider making the financial interests of such persons public. All candidates running for legislatures are, for example, mandated to make their financial interests public. A similar rule could be applied to financial regulators after appointment. It will help boost confidence. In fact, it would help if such persons disassociated themselves from instruments and institutions that could be affected by their decision as a regulator. Another associated issue pertains to the appointment itself. This was a rare occasion when a person from the private sector was appointed Sebi chairperson. The recent controversy should not reverse this. Such positions should be open for both people from the private sector and career bureaucrats, and the best candidate should be appointed. For now, the regulator must complete the investigation and make the findings public as soon as possible.