The Adani Accustions and the Government

My response to a friend who asked why the Government should treat a short seller's accusations (Hindenburg) against Adani seriously.

India’s impressive progress in innovation and entrepreneurship don’t seem to have translated to trust in its stock market. Normal people don’t put their retirement savings in stock market to the extent people in the U.S. or the U.K do.

The Indian stock market makes up approximately 1.7% of the world stock market. This is much lower than what it should be, given India’s size and recent progress. India has a decade or two to win the investors’ trust and claim its rightful share of investment capital, while it can still benefit from its demographic advantage.

The reason for the low valuation is lack of trust in the Indian market systems. India’s stock market history is full of fraudsters (think Harshad Mehta, Dhirubhai Ambani, Chitra Ramakrishna, Chandra Kochhar, Ramalinga Raju). So, it is natural that the investors assign some credence to the accusations. SEBI has much to be modest about.

I believe that Hindenburg may have done a huge favour to the Indian stock market. This may be an opportunity for SEBI to improve its image and the address corporate governance concerns. Let’s say there is a full and transparent investigation. 

Outcome #1: Hindenburg is proven right.

If there is substance behind the charges, Mr. Adani should face the consequences. The companies should be allowed to face the market forces, even if it is painful to the investors. There has been precedence for this everywhere. 

• Around year 2000, Nortel and its parent company, BCE made up over 50% of the Toronto stock exchange.  After incidents of fraud in Nortel’s financials, the Government allowed Nortel to fail. It was painful. I know a few who lost more than half of their retirement savings. But the market eventually recovered. (As a matter of interest, the Nortel CFO who was accused of fraud was an Indian – Clarence Chandran).
• Around the time of subprime crisis, the U.S. government got involved, but still allowed large companies such as Lehman Brothers to fail. Similarly, big companies such as Worldcom and Enron were allowed to fail.

Both markets have emerged stronger, once the ‘poison’ was flushed out. If Adani is guilty, and is allowed to fail, it could be a warning for other fraudsters, resulting in greater confidence in the stock market. 

Outcome #2: The Hindenburg accusations are proven false.

There will be an instant validation of India’s position. The stock market will be rewarded with greater multiples. In this process, SEBI would have been reminded to be proactive in handling such accusations. 

If this were to happen, the best thing for the government would have been to maintain a dignified silence until the results are out, and then tell the international media, ‘next time, give us the benefit of doubt!’

There is a third outcome, when the investigation drags on, or remains inconclusive. That is the worst outcome for the investors, as well as the government. The trust in stock market will remain low.

Normally, the Indian Government is responsible to ensure that agencies such as SEBI function well. But they are not responsible for answering on SEBI’s behalf. 

But given these accusations, the government’s job is ensure that the investigations are finished in a reasonable time (preferably well before the elections), and the results presented well.  Meanwhile, just develop a thick skin.

I think the government’s reaction so far has been like ‘I’m not paranoid; they’re all trying to make me seem so!’. If the PM is not involved, they should not be protesting this violently.  It does not behoove us to allege international conspiracy in these cases unless it’s proven. A mature country does not cry foul and look for sympathy when it is under attack. The U.K government did not cry when Soros attacked their currency in the 90s. In the U.S., Soros has been funding democrats. Republicans hate him, but treat his as an occupational hazard.

I like Dr. Jaishankar, but not his recent interview. All he needed to say was ‘We have reasons to suspect Soros’ motives. We’re investigating the charges against Adani.’ He made too many points that he could not prove (at least not yet). It just sounded quarrelsome.

But what about Soros’ Motives? And Hindenburg’s? I agree that they are both driven by zealotry and profit motives, respectively. But that should not influence how the regulators treat Adani.

Hindenburg seems to have a history of picking companies with questionable practices, taking short positions, and then going public to profit. Having to deal with such short-sellers is a price of admission for public stock exchanges. Tesla was targeted by short sellers. I don’t recall the U.S. public sympathize too much with Tesla when that happened. 

If the charges are proven wrong, I’m sure there is legal recourse. The Adanis are taking Hindenburg to court. Soros is harder, but there may be room, especially if there is collusion between the two. (To the extent it can make sense to sue a 92-year-old man!)