Adani-Hindenburg case: Supreme Court orders stricter market regulation

Market regulation, Adani-Hindenburg
The Supreme Court verdict on Adani-Hindenburg case lays down roadmap for tight market regulation and transparency in line with global best practices.

Stock market regulation: The Supreme Court has instructed the Securities and Exchange Board of India to enhance investor protection measures. This directive follows an expert committee’s recommendations regarding the Adani Group case, where the Adani-Hindenburg controversy exposed significant flaws in India’s stock market system. Chaired by former Supreme Court Justice AM Sapre, the committee submitted its report in May 2023, proposing various ways to bolster the regulatory framework, including timelines and structural reforms.

The court has also focused on the actions of Hindenburg Research, urging SEBI and central investigative agencies to examine the firm’s conduct. Hindenburg Research’s allegations of corporate misconduct against the Adani Group led to a dramatic decline in the group’s stock values, with some companies experiencing over a 70% drop in market capitalisation. The agencies have been tasked with determining if any legal infractions occurred due to the losses Indian investors suffered from the short positions taken by the US-based firm in Adani Group’s US-traded bonds and derivatives.

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To prevent similar future events, the committee advised SEBI to enforce strict investigation timelines and enhance transparency in lawmaking. The market regulator is expected to ensure consistency in its adjudications and differentiate its quasi-judicial and executive functions. The regulator is under scrutiny for potential oversight failures in the Adani case.

Tighter market regulation and transparency

Encouraging listed companies to adopt International Financial Reporting Standards (IFRS) would enhance reporting consistency and provide investors with globally comparable financial information. This approach has proven successful in promoting transparency and trust in major financial markets.

Implementing a platform for real-time disclosure of critical company information, similar to systems used in developed markets, would give investors immediate access to relevant updates and allow for informed decision-making.

While essential for market efficiency, short-selling can be susceptible to misuse. Learning from regulations in the US and EU, India could consider measures like position disclosure thresholds and circuit breakers to prevent manipulative short-selling activity.

Currently, the Indian stock market uses various methods, like additional surveillance measures (ASM) and graded surveillance measures (GSM), to protect investors. These systems alert to unusual stock movements or trading patterns, but the committee believes these are insufficient. They recommend real-time alerts to investors about stocks under ASM or GSM surveillance and simplification of company disclosures for better investor understanding. Additionally, the committee proposes establishing a Central Authority for Unclaimed Property to manage unclaimed private assets.

While SEBI expressed concerns about implementing these recommendations, the Supreme Court emphasised the need for a constructive approach. The court directed the Union Government, SEBI, and the expert committee to collaborate on this initiative. SEBI noted that fulfilling these recommendations might necessitate multiple new regulators and governmental consideration.

Enhancing regulatory independence

Establishing independent review panels composed of legal and financial experts would provide an objective oversight mechanism for SEBI’s decisions and investigations. This structure can build trust and ensure fair regulatory processes.

Creating formal channels for information sharing and joint investigations between SEBI and other financial regulatory bodies (like central banks) would improve regulatory effectiveness and combat complex financial crimes.

Engaging in dialogue and knowledge exchange with international regulatory bodies can help align India’s market regulations with global best practices, facilitating cross-border investments and promoting market stability.

India’s stock market with $4 trillion market cap ranks fifth globally, but lags in investor protection. Increasing SEBI’s independence from political and industry influence is crucial for impartial investigations and enforcement. In the Adani-Hindenburg case, SEBI faced criticism for weakened rules that obscured corporate structures. Following the controversy, there has been a push for SEBI to strengthen regulations, including reporting requirements for conglomerates’ unlisted group companies, though specifics are pending. The overlapping corporate laws in India, which large businesses often exploit, further complicate SEBI’s role. The government must address these legal loopholes to bolster investor confidence in India’s burgeoning market.