Limited role for govt in finance now: Swaminathan Gurumurthy

Have our financial market regulators been up to speed in handling the fallout from the Adani crisis, given that global rating agencies and index providers such as S&P Global Ratings and MSCI have swung into action already?

What is not remembered is that the financial system has institutionalized rating and investment research agencies, and all Adani companies and securities are properly rated as creditworthy. This is what one Corporate Finance Institute (CFI) says on the role of rating agencies: “Rating agencies play a critical role in assessing the creditworthiness of any corporation or country. Ratings are important owing to the existence of imperfect markets and asymmetric information where the company knows better than the investor whether it will be in a position to service its commitments.”

If anything goes wrong, the rating agencies should answer first. But they are the ones who have started asking questions.

S&P Global Ratings and MSCI are hiding their faults behind the so-called speedy actions. RBI and Sebi (Reserve Bank of India and the Securities and Exchange Board of India) stand on a different footing and cannot be clubbed with them.

Sebi relies on the work of agencies like the S&P Global Ratings, and the Indian financial system trusts MSCI’s inclusion of Adani securities in its index.

Hindenburg charges relating to governance, audit, and valuation ratios are very much within the available market information, and all institutional investors must have had knowledge of it. When institutional investors who are well-informed invest, the retail investors follow. This is how the top-down market works. All those who had made it big in a short time, like Adani, will have much to answer for. He has to be probed. But the way it happened to him also needs to be probed as, in the future, any group can be targeted by a bear cartel at a crucial time like an IPO, etc.

The Supreme Court said it would appoint a probe committee on the regulatory framework while junking the Centre’s sealed envelope proposal. Your views.

II don’t think the Supreme Court is doing the right thing by bringing in a super committee above Sebi. It should trust the Sebi. The SC action amounts, in effect, to expressing a lack of confidence in Sebi, which will cause serious damage to the image of the Indian regulatory system in the global market. Only in sensitive political cases like the Hawala case and the Gujarat cases the court had, directly or indirectly, supervised the probes. The Hindenburg report says that Adani manipulated the market, misgoverned the companies, and violated promoter-holding rules. These are not issues for SC to get involved in.

To my knowledge, the only case where it suspects political patronage is in Adani’s port capacity building, in which only two ports were given on bidding by governments directly—one by the Gujarat Congress government in 1994 and another in 2015 by the Congress government in Kerala. The other ports were bought by the Adani group from private operators. It means that the present political dispensation has little to do with Adani port capacity building.

The SC can direct that the concerned agencies Sebi, RBI, and ED should investigate the matter within a time frame. If the committee appointed by the court begins directing and supervising the three agencies, it will be a very wrong precedent.

The sealed cover model was no good model. It was to obviate the wrong consequences of the bad precedent of court intervention from impeding the probe itself. Whichever agency probes a case begins to gather prima facie evidence, forms hypotheses about what happened, and begins to exercise its coercive powers when it finds prima facie any wrongdoing. Till then, the probe should not be in the public domain. Particularly when it relates to the market, the regulator will have to be careful not to create panic till, of course, it finds clear wrongdoing. To keep this process transparent and in the open court will defeat the very objectives of security investigations which are sensitive. Just as wrongdoings can hurt public investors, a wrong way of investigation also can. Hope the SC follows the sealed cover model for the probe till it is over and ready for disclosure and does not, in the name of transparency, allow weekly briefings to the media.

None of the regulatory mechanisms or legal forums expressed concern when the stocks began trading at lofty valuations very fast amid modest profitability at the group level…

They are all rushing because of wisdom bestowed by the adverse turn of events. In Adani’s case, from the ratings and investments agencies to the regulator Sebi and the stock exchanges, all must share the responsibility for not monitoring the unprecedented rise in the share prices. Ratings and investment agencies let down the entire US financial system, leading to the 2008 crisis. All the guys have been lackadaisical when in the language of Alan Greenspan [whom I don’t admire much]there was clearly “irrational exuberance” in Adani shares.

The high level of the group’s overseas debt has attracted views from global investors that may be inimical to the political dispensation. Has the government response been adequate?

In a market economy, the fundamental principle is that the government trusts the market and its mutual checks and balances of operators, rating agencies, investment trustees, and players. If it does not, it must bring in controls that will restrict the market economic forces and players. In Adani’s case, the mutual checks and balances of the market mechanism seem to have failed. The government response can only be to ensure that the regulators do their job and amend the rules for the future if they are inadequate. And to check whether any wrongdoing was motivated by crime and initiate action. That will be the last. There is a qualitative change in the character of the financial market today and in the role of the government now as compared to the 1980s when it was operating the financial system. We cannot be asking questions as if the government is playing the role that it did back then. Though the rules have changed and robbed the government of its power of control, the public and even the judicial psychology seem to hold the government responsible like it was in the 1980s.

Does allegations in certain quarters of a foreign hand behind the Adani allegations square up?

Given the kind of open hostility that some financial sharks like George Soros have for India and the Prime Minister—Soros has specifically mentioned the Adani issue in the context of the Prime Minister—I would not rule out some convergent and powerful forces at work. Adani’s unbelievable growth may have provided them with an opportunity to attack him in the hope of harming the Indian market. That also needs a probe.

The crisis has brought the name of Vinod Adani to the fore. How do we ensure regulators and governments can extract the requisite information from tax havens at times such as these?

In the 2015 G-20 summit, India, France and Germany spearheaded an agenda for more transparency and greater disclosures from tax havens, but ironically this was opposed by the US, which according to a 2015 report, had an estimated investment of $4-5 trillion from tax havens. However, after that summit, more disclosures and information exchanges took place between tax havens and other jurisdictions, leading to an improvement in transparency and accountability, making tax avoidance and the like more difficult for potential violators seeking financial secrecy. But, it is a global problem and a work in progress.

The issue is even if the structures or funds operate from tax havens, once there is a loss of name for an entity that raises money from the public, the capacity to do business is considerably affected, as is being seen currently. Such problems exist everywhere. But nobody will oblige you with information unless there is an arrangement or treaty providing for the exchange of financial information between jurisdictions, like a Double Taxation Avoidance Agreement.