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India’s stock-market watchdog seems to be on an urgent mission to rescue its credibility. A controversial, new proposal to track foreign money to its source is bound to run into resistance from vested interests. But without such powers, the regulator can never claim to run a clean market.
A panel appointed by the Supreme Court in New Delhi recently stopped short of returning a finding of regulatory failure against the Securities and Exchange Board of India. But the committee’s characterization of the SEBI’s ongoing probe into the country’s largest infrastructure behemoth as “a journey without a destination” wasn’t exactly a vote of confidence, either.
Those are large numbers. Specifically, the SEBI wants to verify whether the 42 investors who put capital into these 13 vehicles — 12 funds and one overseas financial firm — are mere fronts for the tycoon Gautam Adani and his family. The conglomerate had strenuously denied those allegations in New York-based short-seller Hindenburg Research’s Jan. 24 report and said that “innuendoes” that any of the public shareholders “are in any manner related parties of the promoters are incorrect.”
It will leave undisturbed all pension pools, as well as public funds with a diverse retail base. Foreign investors linked to a government or a central bank, such as sovereign wealth funds, will also be spared. Everyone else will be judged high-risk, and if their local portfolios happen to be bigger than 250 billion rupees ($3 billion), or if they have a concentration of more than 50% in any one Indian business group, they will have to “provide granular data of all entities with any ownership, economic interest, or control rights on a full look–through basis” until the disclosures reveal names of individuals, retail funds or large, publicly traded firms.
The risk of excessive compliance can never be dismissed by anyone familiar with India’s bureaucratic overzealousness. For now though, the SEBI deserves a chance. The idea that it is about to open a Pandora’s Box is without merit. The regulator’s consultation paper says that it estimates 6% of foreign investment — or less than 1% of the total market capitalization — to be potentially high risk. Besides, it’s willing to grant a six-month grace period to funds that are scaling up or winding down. They can temporarily breach the 50% rule without additional disclosures.
To me, false negatives are a bigger worry. Instead of a $1 billion opaque fund with 51% allocated to one Indian business, the SEBI will be confronted by two such entities, each earmarking 49% of its $500 million corpus to the same group. The drive to root out “briefcase investors,” or dodgy money masquerading as Mauritius-domiciled funds, could thus produce the opposite of the intended effect. Some discretion in classifying an investment vehicle as high risk may be warranted to prevent gaming of the proposed rules.
There’s no suggestion that any of Adani’s beneficial owners are from China. Taking on the border-country issue in the same consultation distracts from the SEBI’s task of repairing its reputation, and gives a handle to those who do not want a new disclosure regime.
Disclaimer: This is a Bloomberg Opinion piece, and these are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper
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