SEBI: The Buch stops here

The SEBI chairperson must now lead by example and demonstrate her actions did not amount to financial impropriety.

Securities and Exchange Board of India Chairperson Madhabi Puri Buch at the National Stock Exchange in Mumbai on July 30. | Photo Credit: ANI

When the Satyam scam came to light in January 2009, it was a bolt from the blue for India’s stock market. Unlike anything ever seen or experienced by way of scams, this was stunning in size, complexity and impact. Then chairman and CEO of the IT company, Ramalinga Raju resigned from his position in a letter addressed to his board, the stock exchanges, and the market regulator Securities and Exchange Board of India (SEBI), while confessing that Satyam’s profits were inflated over several years to unmanageable proportions. He wrote: “It was like riding a tiger, not knowing how to get off without being eaten.”

His words come back with haunting familiarity in the deeply problematic allegations by US-based activist-investor Hindenburg Research against the current SEBI chairperson, Madhabi Puri Buch. The report accuses Buch of investing in an offshore Mauritius fund that’s part of the very fund structure being probed by SEBI for its fund flows into Adani Group companies from 2016-17. It was flagged because companies owned by Vinod Adani, the older brother of Gautam Adani, moved money through this fund structure to invest in the Adani Group and other companies in the Indian stock market. Especially sticky as the period of investments that SEBI is investigating coincides with the years SEBI chief Buch held a stake in the same fund structure: 2015-2018.

To go back to the Satyam blowup, there was complete hysteria in the stock market as shares went into freefall. All eyes turned to then SEBI chief C.B. Bhave. The generally reticent Bhave went on to do several press interactions that day, aiming to assuage panicked investors and also build a plan for the next steps. The magnitude of the scam was horrifying he admitted and quickly began to push for coordinated action with the Ministry of Corporate Affairs among others. And while there were many to blame in that shocking scam, it led to key changes in laws and regulations including the prohibition on insider trading, shareholders’ approval for related party transactions, a whistleblower mechanism, and extensive provisions for penalising fraudulent activities.

This time the shoe is on the other foot. The first question to ask is where investigations into Hindenburg’s accusations of stock manipulation and accounting fraud by the Adani Group are at. The capital markets regulator says it has completed 23 out of 24 investigations. But why has it taken this long? In January, India’s Supreme Court said the Adani Group need not face more investigations beyond the scrutiny of the market regulator. If that were the case, and all faith was being reposed in the regulator, the onus was on SEBI to double down on investigations. After all, we are talking about a group with a market cap of over $40 billion and scores of retail investors across its listed companies. Surely there should be alacrity in investigating the allegations made by Hindenburg and ensuring the money of lakhs of retail investors is safe? These were the very lessons from the Satyam debacle and the impetus for SEBI to bring in tighter regulation on insider trading and corporate fraud.

Adani Enterprises is now keen to launch a $1 billion share sale by mid-September: this after it was forced to hit pause on its $2.5bn offer in the storm of Hindenburg’s first set of allegations. Adani Energy has already raised $1bn from US investors and sovereign wealth funds this month. Would it not be prudent from a regulator’s point of view to clear the air for foreign and domestic investors before more money is raised? After all, at last count, mutual funds in India had investments of over Rs.41,000 crore into Adani companies, no petty change.

The second and related issue is one of reputation. The Adani Group responded to Hindenburg’s report by saying it was an attempt to destabilise the company but more importantly to politically defame India’s governance practices. While the sheer speed with which this group has grown since 2014 can certainly give other corporates the blushes, one conglomerate does not represent India. Institutions such as SEBI do. They set the rules, they monitor the rules and they take action, or are expected to, when the rules are flouted.

This episode, pointing to a grave conflict of interest by the head of India’s market regulator is both harmful and dangerous to India’s financial reputation. The sooner and more explicitly it is addressed, the better. In the first half of August, foreign portfolio outflows stand at close to Rs.20,000 crore: compare that to the previous two months, where the Indian market saw inflows of over Rs.58,000 crore. Even if some of this were accorded to global market gyrations, it is easy enough to join the dots. Hindenburg’s report accusing Buch of having links with offshore funds used by the controversial Adani Group came in over the weekend and for the next three days, foreign institutional investors sold every day. If India is keen on positioning itself as a prime destination for foreign investment, it is vital that accusations by Hindenburg are taken head-on, with transparency and speed.

One example of corporate cronyism puts people on guard. Allegations of regulatory duplicity tells big investment money managers that there is a systemic threat and the money they run could be at stake. It is also an elementary principle: fix your roof when the sun shines. At a time when the Indian stock market has had a spectacular run and money interest is high, the finance ministry should  take on this crisis and resolve it. If Hindenburg’s accusations go ignored now, it will be very difficult to convince the same money to stay committed when global markets turn nervous and the mood on India turns from charmed to wary.

The final and most important concern is the propriety of a regulatory role such as this. In response to the Hindenburg report, the SEBI chief and her husband released a note explaining the nature of their investments. Unfortunately, this does not cut it. As a veteran of the financial industry, Buch must know the startling fragility of a reputation. While individuals are free to make investment decisions around their finances, as the head of India’s regulatory body for all security and commodity markets, Buch, and anyone who holds this role, is akin to Caesar‘s wife and must be above suspicion.

Securities and Exchange Board of India (SEBI) at its headquarters in Mumbai. | Photo Credit: REUTERS

If there is no truth to the allegations in the report, why not immediately make public the conflict of interest disclosures of SEBI’s chairperson, hold an open press conference, and answer the two core questions: did Buch disclose details of the fund linked to the Adani Group and following on that, did she then recuse herself from the Adani investigation? If, as the SEBI chief says, Hindenburg’s allegations are an attempt at “character assassination”, then why stop at a “show-cause” notice? She must proceed with legal action; at last check, the Adani group had also been mulling legal action, something Hindenburg welcomed. However, neither the corporate in question nor the head of the regulator seem to be keen on pressing the legal button.

There is a dark irony in this latest allegation. Buch is a career banker who spent her early working years at ICICI Bank and then went on to head its broking arm ICICI Securities. Memories are still fresh of another ICICI veteran Chanda Kochhar, the former managing director and CEO at ICICI Bank who, along with her husband Deepak Kochhar, is accused of sanctioning credit facilities to the Videocon Group companies in an act of quid pro quo.

Again, from the equity world, there was widespread shock when severe lapses and misconduct came to light on the part of former MD and CEO of the National Stock Exchange (NSE) Chitra Ramkrishna, who allegedly consulted an unknown “Himalayan yogi” to help run the stock exchange while sharing crucial and sensitive information about the NSE with the yogi. The equity market community was and remains very much a “boys club”. Against that backdrop, every leadership win for women felt significant and inspiring. As an office bearer and the principal decision maker for all of India’s equity landscape, Buch must now lead by example and demonstrate her actions were not tantamount to financial impropriety.

At a conference hosted by a business channel in July, an audience member asked the SEBI chief about falling bank deposits and rising mutual fund investors. She laughed beguilingly and said: “You’ve asked me an out-of-syllabus question.” The questions raised by Hindenburg are not. With 45 million mutual fund investors reposing faith in the regulator, its head Buch must answer the questions and prove she has gone by the book.

Mitali Mukherjee is Director of the Journalist Programmes at the Reuters Institute for the Study of Journalism, University of Oxford. She is a political economy journalist with more than two decades of experience in TV, print and digital journalism. Mitali has co-founded two start-ups that focussed on civil society and financial literacy and her key areas of interest are gender and climate change.