I wrote last week that the Supreme Court (SC)-appointed expert committee on the Adani-Hindenburg Research saga had ended up making a powerful legal case for why the Securities & Exchange Board of India (SEBI) would draw a blank (Adani Stock Saga: Clean Chit by SC Committee Raises Questions & Creates a Worrying New Template for Investigation) on the Adani investigation. The committee pointed out that the dilution of disclosure norms by foreign portfolio investors (FPIs) was the loophole that would stymie SEBI’s investigation. Yet, the same expert committee also makes a case for less corporate disclosures by listed entities on the fallacious grounds that ‘a surfeit of disclosures’ are loading us investors “with so much data and noise that the real content necessary to make an informed decision may be lost.”
Investors are, indeed, being bombarded with repetitive information and confused by constantly changing rules that bring new compliance requirements. But the expert committee is not really worried about investors—it uses them as a front to recommend fewer disclosures for corporate India! We will look at this double-speak in detail; but, first, let us examine it in the context of the ‘clean chit’ to 13 FPIs and their 42 beneficial owners who have a concentrated investment in Adani stocks.
The expert committee examined the issue of FPI disclosures in great detail to conclude that SEBI had diluted its own rules in 2018 and dropped a crucial clause relating to ‘opaque structures’ that existed since 2014. This action opened up a huge legal loophole, which, in the committee’s opinion, gave a free pass to the 13 FPIs and their 42 beneficial owners. They were well within their rights not to disclose the ultimate economic beneficiaries of the funds, since the clause preventing ‘opaque structures’ no longer exists.
We don't know why SEBI was so sympathetic to FPIs complaining about disclosure rules; but details provided by the expert committee show that SEBI worked meticulously at engineering the dilution. A committee headed by a deputy governor of the Reserve Bank of India (RBI) recommended changes; comments were sought from RBI, investigation agencies and the general public before making the change. While Indian investors did not understand what was going on, law firms and global consultants advising FPIs produced quick explanatory notes telling their clients about removal of the ‘opaque structures’ clause. In a sudden development on 30th May, SEBI has put out yet another consultation paper that could reverse the impact of this dilution when implemented (SEBI Wants Foreign Investors-FPIs To Come Clean on Ownership; Releases Consultation Paper).
Surfeit of Information
Now, let us come to the committee’s view on disclosures by companies at the time of listing/fund-raising and on an on-going basis thereafter. It says, “there is an urgent need to introspect and take a hard close look at whether there is a surfeit of disclosures that loads and burdens the investors with so much data and noise that the real content necessary to make an informed decision may be lost.” The report quotes data provided by SEBI to ‘empirically demonstrate’ that annual disclosures in India are far wider and more expansive than in the US, leading to “noise and clutter that makes it burdensome and difficult for the investor to get to core messaging that is needed.”
As readers know, we have access to a lot of investor feedback due to our financial literacy work at Moneylife Foundation. While investors are, indeed, bludgeoned with repetitive information, this does not apply to corporate disclosures. No investor has complained about excessive corporate disclosures or felt burdened by them. It is true that investors do not read hundreds of pages of offer documents in complicated legalese, but the problem has already been resolved in several ways: 1) offer documents list important information and risk factors on the front page; and 2) there is a summary of key information, including related-party transactions, promoters’ data, the company’s business, etc. Most discerning investors do read those few pages or receive summaries from their investment advisers/brokers/bank relationship managers.
More importantly, there are two kinds of investors—serious long-terms ones, who do their homework and are a minority, and the large and growing body of day-traders. The latter are unconcerned about corporate disclosures. On the other hand, there are plenty of diligent investors today, who take a long-term perspective on stocks, based on deep research. They attend corporate annual general meetings at their own cost, deep dive into all corporate announcements, track results calls and compile a detailed analysis which is usually shared free of cost on ‘investment groups’ and social media. These groups are followed for the quality of research and analysis that they produce.
In fact, by recommending a reduction of information disclosed by companies, the committee is doing a great disservice to ordinary investors. Such an action would be no better than SEBI’s 2018 amendment that allowed FPIs to hide ultimate beneficial ownership. It also harks back to the time when corporate India, after much lobbying, was allowed to send abridged annual reports to investors. Repeated corporate scandals swung the pendulum back in favour of investors and detailed annual reports, and more, have to be made available on company websites.
The comparison with disclosures by US companies is equally dubious. A simple example will suffice to show why. Investors in India as well as the US were affected when Satyam Computers collapsed after Ramalinga Raju’s confession that he had been cooking the books for years and there were no profits as claimed. While US investors could file a class-action suit, based on contingency fees charged by their lawyers, and got compensated in less than two years, Indian investors got nothing. Our legal system is slow, expensive, does not permit class action, and is often hostage to influential lawyers. The committee itself has admitted that grievance redress in India is poor. Why then is an SC-appointed committee using the Hindenburg saga to help listed entities on the false logic that investors are burdened by a ‘surfeit of information’?
Friction of Frequent Regulatory Changes
It is interesting that the ‘expert committee’ has missed the ferocious pace at which SEBI has been issuing new rules and regulations for other intermediaries, even though some of its members have dealt with the consequences of these actions as part of their core work. Consider these numbers. SEBI issued as many as 40 Consultation Papers in the first five months of 2023, of which 16 were issued in a 10-day window from 12th to 31st May! This is when it ought to have been deploying serious resources on the SC-directed Adani investigation, instead of which it sought six months more to complete its inquiry.
SEBI has also issued 67 circulars since January this year, with one almost every alternate day in March (14 circulars), April (12) and May (11 and counting), apart from nine master circular changes (https://www.sebi.gov.in/sebiweb/home/HomeAction.do?doListing=yes&sid=1&ssid=7&smid=0).This deluge of ever-changing rules is so overwhelming for smaller intermediaries that many of them have simply given up their licences to operate as brokers or financial advisers.
Now, let us come to ordinary investors. Investors receive the exact same information on each of their trades from their broker, exchanges, two depositories and, sometimes, registrars. This is sent in the form of text messages and emails. Multiply that with the number of trades done and you understand why investors lose track of what is important. Can’t all information be consolidated at a single point? The broker should send information to the exchange or depository, and there should be a single authentic text/email sent out to investors. But this finds no place in the recommendations.
Deluge of Consultation Papers
The committee has a lot to say about how enforcement proceedings have sky-rocketed in 2021-22 to over 7,000. It suggests a detailed study and a coherent policy with a clearly articulated settlement process, where ‘financial injury’ (fine paid), commensurate with the violation, becomes a viable alternative to long-drawn investigation and adjudication. Judicial discipline, internal separation of quasi-judicial functions from investigation, strict timelines for completing investigations and a financial redress agency are a set of welcome suggestions by the expert committee.
But the devil is always in the detail of such policies. Just as an elaborate discussion and process created a gaping loophole in 2018, a badly-worded policy will permit egregious wrongdoing to be buried with a settlement—neither admitting nor denying guilty. We cannot forget that there was a serious attempt to bury the massive co-location (Colo) scam at the National Stock Exchange (NSE) through a settlement process. Moreover, SEBI’s weak orders and shoddy investigation have not even ensured that the extent of the scam was properly quantified since it was exposed by us in 2015.
Even if a small investor does not read all disclosures, professional investors and fund mangers do. And they will act once information that is detrimental to the health of a company is disclosed, even if mired in tons of legalese or jargon. And then they will act -- sell or short thus leading to better price discovery.
This reasoning is akin to saying that side effects of medical procedures should not be published because an illiterate person may not understand them. If this is what the "experts" are cooking up, God save us.
I am a small time long term investor.
Reading the voluminous information never changed my view earlier when I used to read the whole rigmarole.
its a complete waste of time unless one is investing a couple of lakhs
Who cares for the poor investors as we are not able to get rid of playing the game plan of simply blaming all the past rulers for everything whether they were Mughals or the Congress. I wonder how Britishers are excepted. Poor investors fall into the trap of large conglomerates without even understanding their intentions and invest their hard earned money only to be felt cheated in the end. They then do not even get any legal solace and finally die fighting for their money.
Beacuse they are not the aspirants of a Rajya Sabha seat or out of way promotion or such sort of gratification.
God save the Nation.
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This reasoning is akin to saying that side effects of medical procedures should not be published because an illiterate person may not understand them. If this is what the "experts" are cooking up, God save us.
Reading the voluminous information never changed my view earlier when I used to read the whole rigmarole.
its a complete waste of time unless one is investing a couple of lakhs
This is heavy but, every Indian citizen should introspect on what kind of system are they leaving to the next generation.
Sucheta and Debashis more power to guys, thank you for speaking up.
Beacuse they are not the aspirants of a Rajya Sabha seat or out of way promotion or such sort of gratification.
God save the Nation.
"Why be afraid, when the Police Inspector is my brother-in-law"
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