Could Hindenburg’s latest allegations have wider implications for India?

This report is from this week’s CNBC’s “Inside India” newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribe here.

No one is questioning India’s sovereignty, as the world’s largest democracy marks 77 years of independence from British colonial rule today.

But — in a topic more suited to this newsletter — some investors have this week been querying whether India’s markets watchdog is independent as it performs its regulatory duties.

The Securities and Exchange Board of India (SEBI), equivalent to the U.S. Securities and Exchange Commission, was the subject of short-seller Hindenburg Research’s latest attack this week. The U.S.-based hedge fund that 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 said Buch and her husband held stakes in an offshore fund where a substantial amount of money was invested by associates of Vinod Adani, brother of Adani group chairman Gautam Adani. Buch dismissed the report’s insinuations as baseless but did confirm that her husband had a stake in the fund.

Unusually, in this instance, Hindenburg — a short-seller that makes money when stocks fall — is attacking a market regulator, rather than a specific stock.

Except, it kind of is.

On Monday, the first day of trading after the allegations were made over the weekend, Adani group companies initially lost more than $13 billion in market value. By the end of the day, the group’s market losses were at $2.4 billion — or 1.2% — while the Nifty 50 index closed flat.

And there are even wider potential implications.

Together, Adani Ports and Adani Enterprises constitute just under 2% of the Nifty 50 benchmark, meaning they can drive the index as a whole — and influence broader investor sentiment.

This means Hindenburg’s allegations pose a problem for India’s wider investor base, as it affects the country’s reputation for regulatory fairness and stability. And all of this comes as India is trying to contrast itself with China, whose rule-makers and enforcers have been criticized for making somewhat arbitrary decisions in recent years.

“The accusations can have a harmful impact if they spark worries over institutional credibility at a time when foreign inflows are volatile and concerns are rising over expensive valuations of the Indian stock market,” Shumita Deveshwar, chief India economist at TS Lombard, told CNBC’s Inside India.

“The key imperative here for the authorities – whether it is the current SEBI chief or the…