Opinion
Indian regulators are getting tough to shore up their credibility
Summary
- Scrutiny of Indian regulators is seen to have increased globally. Trends suggest that Sebi and RBI might act even tougher as we go along.
The recent hyperactivity at India’s banking regulator and the securities watchdog has caught markets by surprise. Commercial lenders have taken a rap for hiding bad loans in private-credit funds. Investment banks are under the scanner for pushing initial public offers (IPOs) past the finish line by funding mule accounts. A homegrown payments pioneer was told to shut down its bank.
Fintech firms in Bengaluru are complaining about regulatory overreach, as is the traditional finance industry in Mumbai. Even some overseas hedge funds are miffed at being asked to make onerous disclosures. The screws will get tightened further. The reason? Misbehaviour of money in the commercial domain has paled into insignificance with a sudden spotlight on its role in the political arena. This scrutiny is affecting both the Reserve Bank of India (RBI) and Securities and Exchange Board of India (Sebi), both of which [are moving to secure] credibility. Sebi’s reputation took a knock last year after New York-based short-seller Hindenburg Research’s attack on Adani Group put its own oversight of the sprawling conglomerate under scrutiny. A Supreme Court-appointed committee said in its report that the regulator had hit a wall in ascertaining if any of the 42 contributories in 13 offshore funds that had invested in the group’s listed firms were fronts for Gautam Adani, an infrastructure tycoon. Adani, who denied all of Hindenburg’s allegations, described the short-seller’s report as a campaign to politically defame India’s governance practices.
It would be embarrassing for the Indian regulator, which has until April to wind up its inquiry, to be beaten by US prosecutors. The US Attorney’s Office for the Eastern District of New York and Justice Department’s fraud unit in Washington DC are probing if people or firms linked to Adani were involved in paying officials in India for favourable treatment on an energy project. While the investigation is at an advanced stage, it isn’t certain that it will lead to prosecution. Adani companies described the report as false. The conglomerate’s market capitalization has slid by $6 billion to $184 billion over two days this week.
The RBI’s problem... pertains to the Supreme Court’s ban on an instrument of anonymous political funding introduced by the Indian government in 2018. The judges are pushing State Bank of India (SBI) for full disclosures on who gave money to whom. As the country’s largest deposit-taking institution, SBI is the touchstone of RBI’s regulatory intent and capability. If the quality of the bank’s data dump of electoral bonds is any indication, it’s unclear if lenders in the country are adhering to basic banking hygiene.
Beyond their common motive [to secure] credibility, the two regulators have their individual goals. Sebi is concerned about froth in asset prices, concentrated positions in illiquid small-cap shares and an unhealthy craze among retail investors for trading options. The market watchdog reckons that it’s time for some spring-cleaning to prolong market excitement. Indian equities, among the most expensive in the world, may extend their eighth straight annual gain once a third five-year term for the Narendra Modi government is assured in polls [this summer]. RBI’s worries may run deeper. A Modi win in the elections could spark a new multiyear investment cycle. Losing oversight of credit flows in the economy at this critical juncture could turn out to be a costly mistake.
Lending for overpriced IPOs or against overvalued gold aren’t the only risks. Person-to-person transactions, such as tenants using fintech apps to pay rents via cards, are a bit too innovative for RBI. The central bank wants beneficiaries of credit-card transfers—on both personal and corporate cards—to be properly registered business entities, authorized to receive merchant payments. But such concerns with financial probity appear petty when compared with the elephant in the room: The country’s largest lender [having run] an opaque corporate donation scheme.
Less than two months ago, RBI practically shut down payments firm One 97 Communications Ltd’s banking unit for being lax with its ‘Know Your Customer’ rules. So imagine its horror when State Bank of India divulged last week, under the top court’s order, that the biggest chunk of funding via electoral bonds facilitated by it came from a lottery operator. Future Gaming and Hotel Services gave nearly ₹14 billion ($165 million) to political parties when its profit in the last five years was less than ₹4 billion.
When under attack for being too soft, institutions tend to over-compensate in other ways. Expect both RBI and Sebi to do exactly that by talking tough—and acting even tougher. ©bloomberg
