India’s handling of this incident, with the eyes of the world on it, has so far been encouraging.
Today in India, the government agreed to a Supreme Court of India probe into the conglomerate of billionaire Gautam Adani, and the Adani Group announced it was hiring accountancy firm Grant Thornton to conduct independent audits of its businesses.
This comes after Adani Group firms have lost 10 trillion rupees of value, just over half of their total market capitalization, on the Indian stock markets in the wake of a January 24 report from U.S. short-selling activist firm Hindenburg Research alleging pervasive fraud. The Adani Group denies the allegations entirely. MSCI responded by lowering Adani Group firms’ weighting in international mutual funds, and the Norwegian sovereign-wealth fund, one of the world’s largest institutional investors, divested from Adani stocks. (For more background on this story, see my piece from Friday here.)
There was some concern that this wipeout would cause widespread economic damage in India. Adani is close with the government of Prime Minister Narendra Modi, and it could have been tempted to protect Adani from scrutiny. But today’s announcement that the government supports a probe into Adani’s dealings is a good sign that won’t happen.
Petitioners brought public-interest litigation before the Supreme Court of India requesting an investigation into the Adani Group’s business. Unlike in the U.S., the Supreme Court of India is allowed to hear cases in which parties don’t have to demonstrate standing, so long as they are acting in the public interest.
The Securities and Exchange Board of India (SEBI), the country’s stock-market regulatory agency, is already investigating both the Hindenburg allegations and market activity surrounding the report’s fallout. SEBI said it is “strongly and adequately empowered to put in place regulatory frameworks for effecting stable operations and development of the securities markets.”
Last week, the Supreme Court asked the government to set up an expert panel led by a retired judge to investigate the incident. “Solicitor General Tushar Mehta told the Supreme Court that though the government is of the opinion that existing regime, regulators and agencies are fully competent to deal with such situations, it would not oppose the SC’s suggestion for [an] expert committee to go into strengthening of the existing regime,” the Times of India reported.
That’s a reasonable position for the government to take, and it should defuse some of the opposition’s speculation that it would go out of its way to protect Adani. That will also help reassure international investors that India is serious about participating in global financial markets.
The Adani Group seems intent to try to reassure international investors as well. It responded to the Indian government’s decision by saying its cash flow remains strong and its business is fully funded, in a statement to Reuters. Hiring an international accounting firm to do an independent audit will also help. One of the accusations Hindenburg made was that some of the Indian auditing firms that Adani Group companies had used in the past were incompetent or corrupt.
It may seem normal for a company accused of fraud to be investigated by its home country’s government and hire an independent auditor. But that’s why the news is significant. So far, India is treating this incident as a problem for markets to solve, with ordinary government involvement to make sure the laws are being followed. Despite the bloodbath for the Adani Group, Indian markets in general are doing fine.
That’s a step in the right direction for India’s economic development. India has the fifth-largest economy by GDP, and it will pass China this year to become the world’s most populous country. Despite still having a lot of catching up to do on economic development and institutional quality, India’s handling of this incident, with the eyes of the world on it, has so far been encouraging.