Bottomline: A trio of events you can’t dismiss

It isn’t every day that you have a refreshing public address by a regulator that may have well set the cat among the errant pigeons. Or a high-profile communication debacle or a chilling revelation of the ugly side of the credit industry.

We take a closer look at the three significant events and what they portend.

SEBI Chairperson Madhabi Puri Buch, in her first televised public address, laid out her approach to regulation. In a nutshell, this spelt a consultative approach to regulation with significant freedom to businesses and investors to tread their own paths, but subject to adequate disclosures and transparency to protect the interests of all participants. She also emphasised the regulator will evolve in step with the advances in technology.

So, SEBI won’t interfere in what businesses do, nor will it question the pricing of IPOs or keep retail investors out of the riskier, Futures & Options segment. It will, however, demand that businesses make 100 percent disclosures of material facts, that IPO hopefuls come clean to explain their share valuation, and that retail investors are better informed of the risks and perils of their actions. It also will take very strong action against violators and those indulging in insider trading or other malpractices like front-running.

These are welcome pronouncements for the capital markets and give hope of a more open and responsive regulator who better appreciates the business needs of participants while also ensuring the interests of less informed small investors are protected. It will also curb the opaque valuation practices of startups looking to tap the public market for funds.

It isn’t every day that you see a large global business, possibly unintentionally, cause significant confusion in the market with its inconsistent messaging. Vedanta’s statements of the past week were responsible for a significant two-way movement in its stock price.

In a filing with the exchanges on February 16, 2022, the company informed that its semiconductor business venture would not be undertaken by the listed entity, Vedanta Ltd. The market, however, seemed to have a whiff of something else, and the stock perked up after opening at Rs 276 on September 14 and charged up after the Vedanta Group Chairman, Anil Agarwal, perhaps inadvertently, told CNBC-TV18 in an exclusive interview that the chip factory with Foxconn would be set up by the listed entity. The stock ended the day at over Rs 305 per share. The counter also witnessed a leap in turnover from the average Rs 200 crore per session on NSE in the past week to over Rs 1,850 crore on the day.

The next day at 4:21 pm, Vedanta Ltd clarified, after the stock had gained further to close at over Rs 314, post scaling to an intra-day high of 320.90 on the NSE and clocking a turnover of over Rs 2,200 crore on the exchange, that: “Further to the clarification issued by the Company on February 16, 2022, we reiterate that the proposed business of manufacturing semiconductors is not under Vedanta Limited and we understand that it will be undertaken by the ultimate holding company of Vedanta Limited, Volcan Investments Limited”.

This caused the stock to slide to just over Rs 290 per share at the session's close on Friday, September 16th, after clocking a turnover of over Rs 1,300 crore on NSE. That sums up to a turnover of over Rs 5,350 crore on the NSE and a stock price variation of over 17 percent from the opening price of Rs 276 on September 14.

While it isn’t quite clear what led to the deviation in response from the Chairman of Vedanta group from the stated position to exchanges in February and the reiteration on September 15th, it did cause significant upheaval in the stock. The fact that Vedanta Group and Vedanta Ltd are distinct also added to the confusion. Did the Chairman not fully comprehend what was being asked? We’ll possibly know in time. But the significant activity his statement caused in the stock price is there for all to see. How this matter is resolved by the market regulator will have significant implications for the future.

You never want to even imagine in your wildest darkest dreams that a vehicle can be used to run over a young pregnant woman. But that’s what happened in Hazaribagh when recovery agents engaged by Mahindra Finance turned up to recover a loan or repossess a tractor it was used to buy from a farmer. An altercation on loan recovery led to the above horrific incident.

The incident brought to the fore the uncomfortable truth about organised sector debt and recovery practices. Though both Mahindra & Mahindra CEO Anish Shah and Chairman Anand Mahindra expressed deep regret and grief at the occurrence, the brazen act exposed the weakness of checks and balances in the relationship of large financiers with their recovery partners.

Did the Mahindra Finance team know that their recovery partner would run over a pregnant young woman? It would be hard to imagine they did. But the incident happened, which calls for corrective measures to prevent future occurrences.

The abuse of the recovery mechanism in the past has attracted action from the banking regulator, the Reserve Bank of India (RBI), which had issued guidelines for this for banks. The policy calls for proper due diligence before appointing recovery agents, intimation to borrowers about the appointment of recovery agents, authorisation letter and identity disclosure, guidelines for repossession and even a certificate course for training of such agents. This policy may require a review, what’s more, non-banking finance companies should also be brought under its ambit (we could not find a similar policy for shadow banks).

A petition in the Supreme Court in 2021 over the use of force by recovery agents of banks and micro-finance institutions was dismissed, but the petitioners were allowed to represent the Finance Ministry on the matter.

How will the RBI and/or finance ministry respond to the latest incident? This is an important factor, as it will have ramifications for the entire credit industry, with valid arguments on both sides—for every genuine defaulter, there are as many, if not many more, willful defaulters.

Clearly, the three events have significant ramifications for those in business and the market. I’ll be keenly watching how things develop on these fronts. So should you.