The recent hyperactivity at India’s banking regulator and the securities watchdog has surprised the market. Commercial lenders took repo to hide their bad loans in private credit funds. Investment banks are under the scanner for pushing initial public offerings past the finish line by funding crowdfunding. A homegrown payments pioneer has been told to close its bank.
Fintech firms in Bengaluru complain of regulatory overreach, as does the traditional financial industry in Mumbai. Even some foreign hedge funds are troubled by being asked to make difficult disclosures.
The screws will be tighter. The reason is simple. Misbehavior of money in the business domain has faded into insignificance with the sudden spotlight on its role in the political arena. This scrutiny affects both the Reserve Bank of India and the Securities and Exchange Board of India, which are struggling to repair their credibility.
The SEBI’s reputation took a hit last year after New York’s Hindenburg Research’s attack on Adani Group put its own oversight of the sprawling conglomerate under scrutiny. An Indian Supreme Court-appointed commission said in its report that the regulator had hit a wall to ascertain whether any of the 42 contributors to the 13 foreign funds that invested in the group’s listed companies were fronts for Gautam Adani, an infrastructure tycoon seen to. be close to Indian Prime Minister Narendra Modi. Adani, which has denied all of Hindenburg’s allegations, just last week described the short seller’s report as a campaign to politically smear India’s governance practices.
It would be a shame for the Indian regulator – which has until April to complete its investigation – to be beaten by US prosecutors. The US Attorney’s Office for the Eastern District of New York and the Justice Department’s fraud unit in Washington are investigating whether people or companies linked to Adani were involved in paying officials in India for preferential treatment on an energy project. While the investigation is at an advanced stage, it is not certain that it will lead to prosecution, Bloomberg News reported on Friday. Adani companies described the report as false. The conglomerate’s market capitalization slipped by $6 billion to $184 billion over two days this week. The RBI’s credibility problem is even more clearly political than the Adani saga. It refers to the sudden ban by the Supreme Court of India on an instrument of anonymous political financing introduced by the Modi government in 2018. The judges are pushing the State Bank of India for full disclosures about who gave money to whom. As the country’s largest depository institution, the SBI is the touchstone of the RBI’s regulatory intent and capacity. If the quality of the bank’s data dump of the so-called voting bonds is any indication, it is unclear whether lenders in the country adhere to even basic banking hygiene.
Beyond their common motivation to restore credibility, the two regulators have their individual goals. The SEBI is concerned about the froth in asset prices, concentrated positions in illiquid small-cap stocks and unhealthy craze among retail investors for options trading. The market watcher thinks it’s time for a little spring cleaning to prolong the excitement in the market. Indian stocks, among the most expensive in the world, may extend their eighth straight year of gains after a third five-year term for Modi is secured in elections that start next month.
The RBI’s concerns run deeper. A Modi victory in the elections could kick-start a new multi-year investment cycle. Losing track of credit flows in the economy at this critical juncture could turn out to be a costly mistake.
Lending to overpriced IPOs – or against overvalued gold – are not the only risks. Person-to-person transactions, such as tenants using fintech apps to pay rent with cards, are a little too innovative for the RBI’s taste. 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 about financial probity seem fairly minor when compared to the elephant in the room: The political executive’s hijacking of the country’s largest lender to run an opaque corporate donation program.
Less than two months ago, the RBI almost shut down the banking unit of the company One 97 Communications Ltd. for being lax with its “Know Your Customer” rules. So imagine its horror when the State Bank of India revealed last week, as ordered by the supreme court, that most of the electoral bond financing it facilitated came from a lottery operator. Future Gaming and Hotel Services Pvt. gave almost 14 billion rupees ($165 million) to parties when its profit in the last five years was less than 4 billion rupees.
When under attack for being too soft, institutions overcompensate in other ways. Expect both RBI and SEBI to do just that by talking tough – and acting tougher.
(Disclaimer: The views expressed in this column are those of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)