Govt must rise above politics and clear the air

The report by Hindenburg Research, a US-based organisation known for shorting shares of overvalued companies, levelling serious charges of share price manipulation by the Adani Group, came on the eve of the Indian budget but also immediately before the Adani FPO worth ₹20,000 crore. The shares of the company fell precipitously, tumbling Gautam Adani off his perch of third richest person in the world.

Although the shares have recovered since then, there have been consequences — domestic political and international financial. The Indian Budget was drowned in the noise of the Opposition demanding an inquiry into charges. Parliament’s functioning is still fitful. Internationally the developments are more serious. A number of major financial institutions like Credit Suisse and Citibank have become cautious of pledges of Adani shares. Even more seriously, Reuters reported on February 10 that Index provider MSCI was preparing to cut the weightage of four Adani Group companies, including flagship firm Adani Enterprises, after “reassessing the number of shares that are freely traded”.

The government’s reaction in Parliament was denial and aggressive counterattack. The political noise is unlikely to abate, with the next Lok Sabha elections barely a year away. But international scrutiny is unlikely to be easily wished away. The government’s entire budgetary approach rests on massive investment in infrastructure development to prime the economy during a period of feared global economic slowdown. However, if the air over the Indian stock market does not clear, how will international funding be available for the planned infrastructure development without which the government’s dream of making India a global manufacturing hub is unachievable?

The Economist magazine devotes two pieces to the Adani saga. It raises the vital need for accountability of big business and transparency in their link to decision-makers. Government’s aggressive riposte to opposition’s demand for an enquiry runs in the opposite direction. The magazine concludes with the advice that “For India to prosper, its institutions will in the long run be just as important as its infrastructure. Indians benefit from clean power and level roads, to be sure; but they also need clean governance and level playing field”,

While the government dug in to defy any suggestion of a probe, Adani attempted his own damage control. Realising that margin calls will follow the steep drop in share price of his companies, he decided to turn necessity into a virtue. On February 6 the Adani group repaid 18 months in advance a $1.1 billion loan. But the futility of this was underscored by Aswath Damodaran of the NYU’s Stern School of Business arguing on an Indian television business channel that by all norms, even liberally applied, the Adani shares are still overpriced.

Many analysts have warned that unless Indian regulators bravely investigate the suspected market manipulations, especially by organisations based in Mauritius or other similar havens, India will suffer in the long term. International finance needs to be reassured that cabals and cartels are not calling the shots on valuations. India needs to learn from the US experience.

In 1902, President Teddy Roosevelt soon after assuming office on the unexpected assassination of his predecessor, resurrected the dormant US Sherman Antitrust Act, which had been passed a decade earlier. He went after 43 major corporations to break up cartelisation and monopolies. Inter alia he broke up the Standard Oil and Railway monopolies. Although the Securities and Exchange Commission was established only after the Wall Street meltdown of 1929, President Roosevelt had established that big business could not operate with impunity and without regulation. He paved the path that the US took as it rose as a global power in the 20th century.

Thus Prime Minister Narendra Modi has a great opportunity to become India’s Teddy Roosevelt. For that he will have to accept that the meteoric increase of Adani wealth raises serious questions about the businessman’s relationship to the present government. The way to deny any wrongdoing by the government can only be if the same proclivity is shown by regulators and agencies in investigating charges levelled by the Hindenburg report, as the agencies show in handling Opposition figures. Mauritius has for long been a route for opaque financing. Mauritius is a friendly country and resists India even discussing the regulation of that route. But in the interest of the nation a thorough reform is needed in how funds flow into India.

In a financially globalised world, by resisting this reform India will suffer on two counts. One, foreign funds will get cautious in moving money into India, which infrastructure development requires. Two, as the MSCI determination shows, international scrutiny shall continue despite Indian government’s obduracy in the face of facts at home. Reputational damage of a market can be irreversible in the short term. The nation and the world waits to see whether the government will rise above politics and clear the air.

KC Singh is former secretary, Ministry of External Affairs