SC Must Avoid Meddling In Adani Case: The Markets Deliver Better Justice On Their Own

It is a pity that the Supreme Court believes it has something useful to contribute in the Adani market shakedown.

The truth is it is totally out of its depth in this area, and surely has better things to do in its own area of expertise — which is the law.

While hearing a public interest petition in the case, a three-judge bench headed by none other than the Chief Justice of India, D Y Chandrachud, had this observation to make: "Stock market is not a place where only high value investors invest. With changing tax regimes, investments are made by a whole lot of people. Perhaps you can also have a word with Ministry of Finance and experts on finance."

Among other things, the bench thought aloud about whether “we (can) contemplate having an expert committee, possibly from banking and investment area, headed, maybe, by a wise guiding force in the form of a retired judge.” 

That there is a judiciary headed panel of wise men who can fix market regulation is the biggest piece of naivete floating around.

Actually, the markets collectively are wiser than most wise men around, even if the former tend to be “irrationally exuberant” or manic depressive in turn.

Let us try and thus remove the court’s belief that it is acting to protect small minnows caught unexpectedly in a land of big fish.

While it is certainly true that ordinary people and retail investors also invest in the stock markets, the assumption that small investors need special protection is wrong.

Most retail investors know that stock investments carry inherent risks, and if they want to reduce risk, they could easily have chosen to invest indirectly through mutual funds. If they still chose to invest directly in Adani stocks, they have only themselves to blame.

The assumption that there are a lot of retail investors in Adani companies is not quite true. I checked the public shareholdings in four Adani companies — Adani Enterprises, Adani Ports, Adani Power and Adani Total Gas — and I found that the promoters in three of them held nearly three quarters of shares, and 65 per cent in Adani Ports.

The public had 6.5 per cent in Adani Enterprises and Adani Ports, 12 per cent in Adani Power, and under 0.1 per cent in Adani Total.

In fact, if you go deeper into who is defined as public, even here you don’t find many retail investors.

I did not look at all Adani companies for many of them were already publicly owned before Adani entered the picture, like the two cement companies ACC and Ambuja Cement, or Adani Wilmar, which is an FMCG company where the promoters, including Wilmar group, hold 88 per cent.

These companies need not fear too much rigging since their underlying businesses are all profitable and these companies operate in competitive areas, and margins are higher. 

So, we must first conclude that if anyone has lost real money, it is the Adanis and institutional investors themselves.

But if we assume that most of the short-selling on shares in India was done by high-net worth and institutional investors, it implies that some of them would either have made money through the short-selling itself, or managed to cut their losses early.

The markets are making them pay for any collusion with the promoters in driving prices up earlier.

The second point to investigate is whether Adani shares were indeed rigged upwards in the period after 2020 through round-tripping of money between India and offshore shell companies owned by the Adanis either directly or indirectly.

Again, the sharp fall in Adani bonds abroad and shares in India suggests that the markets are themselves the best disciplinarians of errant promoters.

SEBI’s primary job is to ensure market integrity, and to the extent prices are rigged, it must investigate the underlying reasons to check if parties have been acting in concert to defraud other investors. But don’t bet on huge new revelations here.

However, this is where an understanding of macro conditions is important.

Contrary to popular assumptions, share prices do not always follow a logic based on the “fundamentals” of companies.

Shares surge when liquidity conditions are easy, and this is exactly what was happening when Adani and other companies’ shares zoomed.

Post 2008, all central banks were offering almost zero-interest rates, which is why even the US stock markets boomed after the Lehman collapse.

Once Covid intervened, central banks again unleashed a flood of money to hold their economies up. 

This is to say, stock market regulators can do little to temper “irrational exuberance” in stocks when money is literally free.

In the US, this aspect of policy was called the “Greenspan put”, named after the former US Fed chairman Alan Greenspan, who ensured adequate liquidity whenever the markets became excessively volatile on the downside.

On the upside, he was less worried. The put refers to a term in options trading, where the person buying a put gets the right to sell at a particular price, but does not have to do so.

Greenspan’s policies ensured that investors could avoid big losses because he offered them a put option, a safety net, whenever prices crashed.

The point to understand is this: conditions of liquidity are determined by central banks and not market regulators.

Hence the latter’s ability to prick a ballooning market is limited to ensuring orderly trading conditions. SEBI cannot influence the underlying causes like easy money.

It is also worth noting that everyone, except a few short-sellers, loves a booming market — governments, investors and companies.

So in a democracy, the overall inclination of regulators is to let the good times continue.

Very rarely do regulators intervene and become party poopers.

Booms and busts occur because, as Robert Shiller pointed out in his book Irrational Exuberance, the stock markets are “naturally occurring Ponzi schemes”, where the wealth made by an initial set of investors high attracts media attention, and this draws even more investors into a particular stock or the markets in general.

This phenomenon of an expanding investor universe ensures that the markets rise even further.

A rise in market prices is often a self-fulfilling prophecy till something happens to bust investor overconfidence.

In Adani’s case, the trigger was the Hindenburg report, but if there was no Hindenburg, something else would have come up some time or the other at a later time. Even Tulip mania had to end some time.

The memo to the SC is simple: don’t meddle in things you don’t understand. The markets may be fickle or irrational, but when it moves, it delivers karmic justice better than most courts.

Adani’s karma has caught up with him, and he now needs to focus on downsizing his businesses to reduce debts and focus on improving margins and cash flows.

There is nothing the courts, SEBI or the Reserve Bank can do to discipline Adani excesses better than what the markets themselves have done.