Who will guard India investors from the regulators?

Governments and market regulators often ignore reputation risks in wake of rising markets only for these risks to come haunt the markets when it falls

In the early morning hours of October 24 came the news that a meeting of the Parliament’s Public Accounts Committee (PAC) was cancelled and rescheduled for a later date. This PAC meeting was keenly awaited as Securities Exchange Board of India (SEBI)’s chairperson Madhabi Buch was to appear before the committee regarding the case of Adani group.

There have been allegations that SEBI delayed its report on Adani Enterprises because there are investment links between Buch and Adani group. It is a matter of grave concern that despite the seriousness of the allegations, the government and stock market regulator continue to function as if nothing has happened.

The cancellation of the PAC meeting pops the important question: “Who will guard us from the guardians”? Humans have for long thought of ways to organise society by appointing some person (or persons) as the guardian of the society. But then how does society ensure that these appointed guardians do their job?

This question is attributed to Roman poet named Juvenal who asked in Latin ‘Quis custodiet ipsos custodes’. The Latin phrase translated in English as ‘Who will gaur the guards themselves?’ Juvenal posed this question for marital fidelity and is now used to check accountability of governments and institutions.

The SEBI Act

Governments create multiple institutions to govern political and economic activity. Post-Independence, Indian equity markets were regulated by the Controller of Capital Issues (CCI). Post-1991, as economic reforms spread throughout sub-sectors of the economy, there was action on reforming equity markets as well. The Harshad Mehta scam also acted as a catalyst in ushering in the reforms.

One of the first steps taken by the government was to establish a new regulator for capital markets. The government enacted the SEBI Act in 1992. The SEBI Act (1992) specifies that the purpose of SEBI is ‘to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto’. It is important to note that Act specifies ‘interest of investors’ as one of the primary objectives of SEBI apart from development of securities markets.

Given this broad background, two questions need to be asked: First: Has SEBI done enough on the Hindenburg-Adani case to protect the investors? The answer is a resounding ‘No’. The second question: Who is guarding the Indian investor from SEBI?

A lackadaisical approach

In January 2023, United States-based short-seller Hindenburg Research published a report saying the Adani group ‘engaged in a brazen stock manipulation and accounting fraud scheme over the course of decades’. The report created a flutter in the markets. SEBI started an investigation, but the report was delayed constantly. This led people to file petitions in the Supreme Court, and the court constituted its own committee and asked SEBI to continue its investigation and submit the report at the earliest.

Till date, SEBI has not published any report/document on its Adani investigation. It is bizarre that the regulator has not followed the orders of the apex court and is adopting a lackadaisical approach to comply with its orders. SEBI’s report is deeply important for investors as there is so much investor money in the various companies of the Adani group.

Further complicating matters, Hindenburg, in July, alleged that the SEBI investigations have been delayed as Buch and her family have investment interests in the Adani group! The chairperson and her husband have denied the accusations and issued statements. But is that enough?

Let’s say is an investor is indicted of a fraud and that investor issues a statement saying ‘I am not guilty’. Will SEBI deem that statement as sufficient? Absolutely not! It will conduct an inquiry. Shouldn’t similar rules apply to the SEBI chairperson as well? It’s been months since these developments, but there has not been a single statement from the SEBI Board. Even the government is silent on these allegations.

Betrayal of confidence?

SEBI’s conduct leads us to the second question: Who guards the Indian investors from SEBI? Thankfully, in this case we do have an answer. As Parliament has created the regulator, it should be guarding the investors from SEBI. In this regard, the Parliamentary PAC had summoned SEBI officials to explain the state of its investigation. The PAC would have also asked the SEBI chairperson to explain her position given the allegations. However, the October 24 meeting was cancelled.

Ideally, SEBI should have played the role of guarding the securities market well, but it its conduct ever since the January 2023 allegations and now against its chairperson has betrayed the confidence placed in it. These cracks have been ignored so far due to the rising stock markets. But then we have seen this story play out too often in financial markets. Governments and market regulators often ignore these reputation risks in wake of rising markets only for these risks to come haunt the markets when it falls.

(Amol Agrawal is an economist teaching at Ahmedabad University.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.