Moneycontrol Pro Panorama | SC panel needs to think out of the box

The short positions created in the Adani Group originated in markets abroad through structured product derivatives (SPDs). SEBI should ensure that there is transparency in such trades which need to be reported and not carried out clandestinely.

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The Union government has, in a written submission, told the Supreme Court that it has no objections to setting up an expert panel to strengthen the regulatory mechanism, amid the Adani row. At the same time, they have said this is by no means a vote of no-confidence in the market regulator. As for the Indian market as a whole, it has already shown its resilience by confining the risks to the Adani Group stocks.

In the hearing, the Chief Justice put forth the suggestion to constitute a committee. He said, “One of the suggestions is to have some committee... We do not want to cast any doubt on the SEBI or the regulatory agencies. But the suggestion is to have a broader thought process so that some inputs can be obtained. And then, the government can take a call as to whether some modification is required of the statute, whether a modification for the regulatory framework is required. Beyond a certain stage, we won't enter into the policy domain, but there should be a mechanism that it doesn't happen in future. This is the call that the government has to take.”

The panel should, however, take a holistic view of the entire episode. Similar future incidents can be prevented only if we look at the source of such events. The panel will have to take a hard look at the oversight by the regulator and put mechanisms in place to ensure that such events are not repeated.

Simply put, the rout in share prices we saw over the last few weeks was the endgame and not the beginning of the problem. SEBI told the Supreme Court that it is comprehensively probing the Hindenburg Research report allegations and also the movement of share prices pre- and post-publication of the report, using its powers under the regulations and norms governing offshore derivative instruments (ODIs) and short-selling.

But the problem started much earlier, when the share prices started moving up without any corresponding movement in the fundamentals. That should have served as a red alert for the market regulator, and it should have discreetly ordered an internal probe to ensure that investors’ interests were protected.

Unfortunately, that didn’t happen. Indeed, it is only when stocks crash that there’s a demand for a probe and nobody complains when they shoot up.

The panel can ask the market regulator to have a system in place that warns of coordinated positions being built up. This should be done in near real-time and not with a lag as it happens currently. Information about the source of funds should be regularly collected, all the more so when there are unusual movements in a stock.

The short positions created in the Adani Group originated in markets abroad through structured product derivatives (SPDs). SEBI should ensure that there is transparency in such trades which need to be reported and not carried out clandestinely. If need be, it should co-ordinate with regulators and stock exchanges abroad.

Finally, all probes should have a deadline or periodic reporting of their progress. Delays in carrying out the investigations defeat the purpose.

In short, the panel suggested by the Supreme Court can add value only if it thinks out of the box and calls a spade a spade.

Like it or not, this is a policing failure, and SEBI needs to learn the right lessons from it.

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Shishir AsthanaMoneycontrol Pro