Could Hindenburg's latest allegations have far-reaching consequences for India?

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The big story

India's sovereignty is not being questioned as it celebrates 77 years of independence from British colonial rule.

This week, some investors have questioned the independence of India's markets watchdog while it carries out its regulatory responsibilities.

This week, Hindenburg Research, a U.S.-based short-seller, launched an attack against the Securities and Exchange Board of India (SEBI), which is equivalent to the U.S. Securities and Exchange Commission. The hedge fund, which had previously bet against Adani group companies in early 2023, has now accused the head of the SEBI, Madhabi Puri Buch, of having a financial interest in one of the parties her agency was investigating.

The short-seller accused Buch and her husband of holding stakes in an offshore fund where associates of Vinod Adani invested a substantial amount of money. Buch denied the allegations, but her husband admitted to having a stake in the fund.

In an unusual move, Hindenburg, a short-seller that profits from stock declines, is targeting a stock market regulator instead of a specific stock.

Except, it kind of is.

On Monday, after the weekend allegations, Adani group companies initially lost more than $13 billion in market value. However, by the end of the day, the group's market losses were at $2.4 billion, or 1.2%, while the closed flat.

And there are even wider potential implications.

The combined weight of together and constitutes just under 2% of the Nifty 50 benchmark, making them capable of driving the index and affecting broader investor sentiment.

India's reputation for regulatory fairness and stability is at risk due to Hindenburg's allegations, which may deter investors and undermine efforts to differentiate India from China's rule-makers and enforcers.

If accusations cause concerns about institutional credibility, it can harm the Indian stock market, which is already volatile and facing expensive valuations, as Shumita Deveshwar, chief India economist at TS Lombard, stated in a CNBC interview.

"It is crucial for the authorities, including the current SEBI chief and the central government, to maintain the image of the stock market regulator as an independent and credible institution."

To improve the image, the economist suggested conducting a fair audit, as perceived by the public. He also noted that if the SEBI continues to protect small investors, as it has done recently by warning about bubbles, the impact of the allegations will be minimal.

Rajeev Agrawal, a U.S.-based hedge fund manager and managing partner at DoorDarshi India Fund, stated that the allegations against the chief of the market regulator should not significantly affect valuations because SEBI's processes are institutionalized and not linked to a specific individual.

As per Jefferies' chief financial economist, Mohit Kumar, investors should be aware that India, being an emerging market, comes with inherent risks.

Despite accusations against the chief market regulator, Jefferies remains "structurally bullish" on India due to its "growth story with favorable demographics," as Kumar stated.

He stated that while there may be episodes with individual company concerns, it does not affect our medium-term bullish outlook on India.

Need to know

Ola Electric, an Indian electric vehicle startup, has IPOed with a valuation of $4.8 billion. The shares of the SoftBank-backed electric scooter maker have increased by 45% above their debut price. Despite shipping its first product only about two and a half years ago, the company is expected to account for 60% to 70% of all new scooter sales in India by 2030. Two-wheelers are the most popular means of transport in the country.

The northeastern state in India has introduced a mobile application to alert people of approaching wild elephant herds in an attempt to minimize human-elephant conflicts. In recent years, the number of violent encounters between humans and elephants has increased in India, as the animals become more aggressive due to habitat loss and fragmentation caused by urbanization.

Narendra Modi, the Prime Minister of India, has announced the country's ambition to host the Olympics in 2036. According to CNBC-TV18, Modi stated on Thursday that India is leaving no stone unturned in its efforts to host the Olympics. Along with India, several other nations such as Saudi Arabia, Qatar, and Turkey are also positioning themselves as strong contenders to host the sporting spectacle. The International Olympic Committee (IOC) is expected to decide the host only next year after holding its elections.

What happened in the markets?

This week, the Indian stock index lost momentum, closing at 24,143.75 points, just 0.95% away from a 1% loss. Despite this, the index has still risen 11.10% year-to-date.

The Indian government bond yields have been steadily declining, with the benchmark 10-year trading at 6.86% this week, which is two basis points lower than the previous week.

This week on Biz Focus Hub, Kranthi Bathini, director of equity strategy at WealthMills Securities, stated that the stock market has been experiencing a "liquidity-led rally." Bathini predicted that the Nifty 50 could reach 30,000 points, which is approximately 25% above current levels, "much sooner" than 2030.

According to Herald van der Linde of HSBC, India and Indonesia possess domestic-oriented stock markets and economies, which enable them to remain somewhat immune to global market fluctuations.

What's happening next week?

August 20: Sweden interest rate

August 22: India PMIs, Eurozone PMIs, UK PMIs, U.S. PMIs