Markets To Hold Steady
The BSE Sensex and NSE Nifty ended the week's last trading session with gains, closing higher by 1 per cent each
On Episode 361 of The Core Report, financial journalist Govindraj Ethiraj talks to Ajay Rotti, founder & CEO of Tax Compass as well as veteran economic journalist Shankkar Aiyar.
Our Top Reports For Today
SHOW NOTES
(00:00) The Take
(06:45) Markets To Hold Steady
(08:00) Global anti money laundering watchdog wants India to step up diligence on politicians
(09:22) Should Sebi set higher standards on disclosures of key staff?
(16:53) Computing India’s inflation numbers, what is working and not?
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regards any feedback, you can drop us a message on [email protected].
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Good morning, it's the 12th of August and this is Govindraj Ethiraj, headquartered and broadcasting and streaming from Mumbai, India’s financial capital.
The Take
Many years ago, I remember interviewing the late Yogi Deveshwar, who left cigarette and consumer products giant ITC to join Air India as a lateral hire and Chairman between 1991 and 1994.
He thus became a Government employee but could not last long and then finally went back for a solid stint at ITC until 2017.
I asked him then why he returned to ITC because the perception was that Air India was a much bigger mandate and challenge.
“It was too much and I felt I had a great opportunity at ITC,” is what he said. Unsaid was the fact that he was tired of battling the entire Governmental system which was so firmly entrenched in running Air India those days.
Let me switch gears again a little bit.
Gary Gensler is the Chair of the US Securities & Exchange Commission, the powerful body that regulates all aspects of the US Securities Industry including of course stock markets.
Gensler was a professor at MIT Sloan before he came to the SEC and earlier in life before joining public service, worked at Goldman Sachs and even led fixed income and currency trading in Asia.
But there have been other senior treasury secretary officials to emerge from Goldman Sachs
Steve Mnuchin who became treasury secretary in the Trump Administration was the third treasury secretary to come from Goldman Sachs. Robert Rubin, Treasury Secretary from 1995-99 and Hank Paulson, who headed it through the 2008 financial crisis.
Even at that time, while there were some noises about him trying to save his friends on Wall Street, they died down pretty fast.
Why are we talking about the SEC when the news is about Sebi ?
I'm coming to that.
It has taken time for Indian financial markets and specifically Sebi and RBI to bring in lateral hires.
RBI brought in Raghuram Rajan as Governor and Sebi brought in Madhabi Puri Buch, who spent considerable part of her professional life in ICICI Bank, as part of the original growth team.
Whatever the outcome of the latest salvo that Hindenburg Research has fired at Sebi, its chairperson and the Adani Group at the same time, it should not be that lateral hires are discouraged.
For lateral hires from the private sector, unfortunately, it also means the scrutiny is much higher also because India is still adjusting to this way of life.
The US system that I referred to in the case of the SEC or the Treasury Secretary is more accustomed to people moving from the private sector to Government and then back too.
This also means that the systems to manage these transitions, including the disclosures are rock solid so as to ensure there is no suspicion that someone is batting for their old friends.
The question to ask now is whether India is there ? Answering this question is important for future hires as well.
And more importantly what can we do to improve the transparency and disclosure levels ?
Now on Hindenberg’s latest salvo, there is nothing in it that suggest, having looked at the allegations and the rebuttals, from the Sebi chairperson and her spouse and the other funds in which they invested overseas at different times and of course Adani Group themselves, that there was any material benefit to Ms Buch.
SEBI also put out a statement saying," It is noted that relevant disclosures required in terms of holdings of securities and their transfers have been made by the Chairperson from time to time. Chairperson has also recused herself in matters involving potential conflicts of interest."
Now, let me recap quickly.
In its latest report released Saturday night, Hindenburg projected links between offshore funds that traded in Adani Group shares with personal investments of Buch and her husband.
It says one fund, the Bermuda-based Global Opportunities Fund, was used by entities connected to Adani Group to trade in the shares of group companies, and had sub-funds.
Buch and her husband were investors in one of these sub-funds in 2015, Hindenburg alleges, basing it on whistleblower documents.
Incidentally, the fact that a whistleblower, quite likely sitting inside Sebi, delivered the documents to Hindenberg is intriguing and interesting at the same time.
Anyway, in 2017, before Buch was appointed as a full-time SEBI member, her husband requested to be the sole operator of the account. In 2018, Buch wrote an email seeking to redeem her husband's entire investment in the fund.
All this is from the whistleblower documents.
In 2022 she was appointed as head of the regulatory body.
"We think our findings raise questions that merit further investigation. We welcome additional transparency," Hindenburg said.
Buch’s position expectedly is that they had no hesitation in disclosing any financial documents to any authority. "All disclosures as required have already been furnished to SEBI over the years," they said.
The sub-fund she had invested released a statement on Sunday saying it had not invested in any shares of Adani Group.
We are going to dive into the disclosure part shortly with Ajay Rotti but it would appear that there is a case to be made for greater disclosures in future particularly in sensitive public positions like a Sebi chief.
So the argument is more about the spirit of disclosures rather than the letter of disclosures.
For someone coming in from the private sector, some of it might seem excessive and even painful but this is the price to pay for public office.
And no amount of disclosure is less.
It's also amusing in a way to see how all the players named have circled their wagons around the Sebi chairperson, including or separately the Association of Mutual Funds of India.
Why an industry body would shoot off letters of support beats me.
There is no need.
The way forward is tricky.
Ms Buch, the chairperson would do well to distance herself from a formal probe to establish the facts and present them.
She could do even better to set new guidelines for transparency and disclosures and set an example by uploading all her assets and transactions, including the family, on the Sebi website.
She should do it quickly too.
The wrong thing to do would be to take cover behind character certificates doled out on social media or by institutions like AMFI.
Or shoot the messenger.
Hindenburg does not matter here.
Our Top Stories & Themes
Markets To Hold sTeady
Global anti money laundering watchdog wants India to step up diligence on politicians.
Should Sebi set higher standards on disclosures of key staff ?
Computing India’s inflation numbers, what is working and not ?
Markets & More
The BSE Sensex and NSE Nifty ended the week's last trading session with gains, closing higher by 1 per cent each.
On Friday, the Sensex climbed 819.69 points or 1.04 per cent to settle at 79,705.91, while Nifty50 ended 250.50 points or 1.04 percent higher at 24,367.50.
The broader indices like the Nifty Next 50 and Nifty 100
Midcap and Smallcap indices were all positive.
Elsewhere, Bloomberg reported that hedge funds are the most bearish on commodities prices in at least 13 years as fears of a deeper economic slowdown cast doubts on demand for everything from crude oil to metals and grains.
Will Hindenberg’s latest attack affect the markets ? Well, it does not look like there are no stock linked revelations, at least so far.
Global FATF
The Financial Action Task Force (FATF) global anti-money laundering watchdog has asked India to improve due diligence on the bank accounts of local politicians, government officials and their families, Reuters reported.
The recommendation for tougher checks on the finances of politically exposed persons (PEPs) is part of a FATF review of India's anti-money laundering systems that began in 2023. The group is due to publish its final report soon.
Under global rules, politicians, their families, and close associates are subject to checks on their bank accounts due to their potential susceptibility to bribery and corruption.
A FATF report shared with the government recommended more rigorous monitoring of the source of funds in the accounts of domestic PEPs as well as requiring senior bank managers to approve any new accounts for them or their families.
"There are areas where we need to improve, which we will," a senior finance ministry official told Reuters.
Interestingly, last December, the government told parliament it did not intend to put domestic political figures under stricter banking scrutiny, adding that it would wait for the FATF's report before making any changes.
The FATF in June said India had reached a high level of compliance in enforcing anti-money laundering laws. The government has five years to implement the recommended banking rules before the next review, one of the sources said.
The FATF rated India as "compliant" and "largely compliant" on 37 out of the 40 parameters for enforcing anti-money laundering laws, the sources said.
SEBI
Sebi chairperson Madabhi Puri Buch said on Sunday that all their investments and business activities, including shareholdings and company statuses, have been transparently reported to SEBI, Singapore authorities, and Indian tax authorities.
This is quite likely true.
The larger question is it enough and what are the lessons for the future for officials holding public office in securities markets in specific and Government in general.
I spoke with Ajay Rotti, Founder & CEO of Tax Compass and began by asking him what were the level of disclosures, ideal or otherwise and lessons from the current episode.
INTERVIEW TRANSCRIPT
Ajay Rotti: From our actual disclosure perspective, until the report came out last evening, I don't think we knew any of this ourselves. So in that sense, there was no Voluntary Disclosure from the chairperson side or anybody in SEBI in relation to this. But now, after having you know, seen the facts, the dates, if we are able to link the dates when they exited, what has happened, and also the disclosure by I felt that there have been no investments maybe, you know, in their wisdom, they thought it's not important enough to disclose, etc. But even if that had to disclose, the code of conflict of interest that applies to all members of SEBI board, including the chairperson, only requires them to disclose those investments and interest to SEBI, so which, you know, they claim to have done, therefore, the fact that they had investments, or they have investment in some of these consulting companies in Singapore that has come out in the report, the chairperson says that they had disclosed this to SEBI at the time of appointment, and in any case, the other investments were exited before she actually got appointed.
Govindraj Ethiraj: And let's look at the code on conflict of interest for members of the board, which was released in 2008 which is interesting because I don't know if there was an earlier versions. I mean, SEBI came up in 93 so till 2008 if there was no other code before that, it looks like the code only came up then, yes, it is interesting that we've got it in 2008 I guess these things happen when you face situations like this and then, which will also bring me to my other question in a moment. I in a moment. But if you look at the code itself, there are couple of areas conflict in respect of agenda, which means, if there is any perceived conflict in even somewhere, because of some company where you may have common shareholding or CO invested with someone, you should have declared it to the board. So one should assume, therefore, that all this has been declared to the board, right?
Ajay Rotti: Yeah, that should be the assumption, because you're right. There are two parts to it. One is on conflicts relating to what comes up before the agenda. And second is more on investments. And investments requires ongoing compliance and disclosure every at the end of 15 days from the end of the financial year, they're required to disclose. I guess some of these should have been disclosed if there was indeed a conflict and there was indeed an investment in related entities, etc.
Govindraj Ethiraj: Under the term other disclosures in the same code on conflict, it says members should disclose any post employment of judiciary position which a member holds or has held in the past five years. It also talks about disclosing significant relationship, including professional, personal financial held in connection with a regulated entity and even an honorary position, should be disclosed. So do you feel that this is enough as things stand before we look ahead?
Ajay Rotti: In my view, you know some of these disclosures, and especially any professional other relationship that especially close family members have with organizations which are regulated, listed, etc, while the disclosure to SEBI is what the code of conduct requests, I would think the more appropriate one, after going through and seeing what we've seen here, maybe to do a public disclosure today, we've had situations where even the high court judges today are required to put up their set list on the website. Of course, some have not yet complied, but then that's really what has to be done, as the courts have taken to view. Plus, if you see our MPs today, their affidavit has disclosure of every assets that they own, including investments that they have done and things like that. So maybe even for the full time members of sebi. Of course, there's some carve outs for government appointed nominees, et cetera. You could look at some cargos like that, but for especially important positions like chairman, Chairperson, etc, who can decide courses of investigation, choice of entity, etc, maybe a public disclosure may be a better thing going forward to actually put up on the SEBI website that this is where the interests are. These are the investments and these are the associations that the spouse, family, children have with some of the regulated entities.
Govindraj Ethiraj: Right. If you were to now, contrast this with the overall levels of disclosure in public office. Any thoughts there?
Ajay Rotti: You know that is something where we've been improving as a jurisdiction, as a country. Over the last few years, we were terrible, even on disclosures of MPs and our elected representatives many years back. So there is always a scope for improvement when it comes to disclosure, there's the more transparent, the better it is, more particularly when today we are looking at people coming in as lateral hires. And so if you see all the list of SEBI chairman in the past, incidentally, Miss Bucha is the First Lady to have held this office, and is also the first non bureaucrat or non government undertaking. So all others were IAS or from IDBI, and, you know, organizations like that, but never as a private sector person got into a role like this. So with that happening more, you know that disclosure and transparency has only got to go up, because we will have private citizens will have had their own transactions before they have come in, unlike bureaucrats who would have followed some of these mode of, you know, code of conduct, disclosure, not investing in certain companies, etc, all their careers. But if private people are coming in, the disclosure standard has definitely got to go up even further.
Govindraj Ethiraj: And if you were to look at, let's say company boards and how as a country, we are now in terms of disclosures and transparency, how would you contrast that with, let's say the disclosure. And transparency levels in a board of a SEBI, or it could be a reserve bank or similar organizations.
Ajay Rotti: I think there should be higher standards for regulators for the examples set to talk RBI, SEBI, etc, then compared even to the board, company boards, company boards, independent directors, may have to disclose, and they do disclose if there is conflict of interest, and they don't participate in some of the, you know, agenda items, voting, etc. But I think, in my view, people holding public offices, regulators definitely to have a lot more, higher standard in disclosure and transparency.
Govindraj Ethiraj: If this was a company board or similar, how would you think that this should play out now? How do you feel it should be handled.
Ajay Rotti: And these are my comments in terms of all the facts coming out, because they're still coming out. Absolutely, yeah, the dates are important. You know, when they have actually invested, not invested. I don't know if whether they have made gains or not will be that important, while it may eventually play out a role. But I think when we are looking at disclosure, it has to be more on whether there was indeed a potential, possible conflict, rather than if it resulted in a pecuniary gain, etc. So I think we'll have to just wait and see, in terms of, you know, what disclosures were actually made. Was SEBI kept informed, if SEBI, who in SEBI, because remember, we are talking of the chairperson the other whole time, members of the board could have said, we've disclosed it to the chairperson, and the chairperson, if they say that we've disclosed it to SEBI, who, in SEBI would have been actually privy to this information and what was done about it. So a few more facts have to come out. I think they will get to the bottom of this. And that's, I think, the need of that, rather than, you know, look at what this means, and if it's actually a fraud, scam, etc, I think we should be focusing on getting more information. And actually, SEBI and the chairperson have to disclose a lot more in terms of what has come out at this point.
Govindraj Ethiraj: Ajay, thank you so much for joining me.
Ajay Rotti: Thank you, Govind
India Is Set To Rejig How It Calculates Inflation. Is That A Good Thing?
An Indian government panel tasked with revising the nation’s consumer price index is considering a substantial cut in the weighting of food, Bloomberg reported
The panel, which is part of the statistics ministry, is discussing a proposal to reduce the weight of food in the consumer price basket by as much as 8 percentage points, according to the person, who asked not to be identified as the discussions are private. The food and beverage category makes up 54.2 per cent of the current CPI basket.
The CPI is currently based on consumer spending patterns surveyed in 2011-2012, which economists say are outdated and may be distorting the official inflation data the central bank uses to set interest rates.
For example, recent surveys show consumers are spending less of their budget on food than they did a decade ago.
The Reserve Bank of India has kept interest rates unchanged for more than a year.
Food is a big driver of inflation in India given its high weighting in the CPI basket. In June, food prices rose 9.36 per cent from a year earlier, pushing up the headline inflation rate to 5.08 per cent.
Excluding food and energy costs, inflation was 3.15 per cent.
The CPI currently has some 299 items, of which many are outdated, like horse cart fares and video cassette recorders and costs of audio and video cassettes likely weeded out of the calculation.
The changes to the CPI weights and the base year, which are under consideration now, will likely only be implemented by January 2026, said Bloomberg.
India’s Chief Economic Adviser V Anantha Nageswaran, last month argued the central bank’s inflation target should exclude food.
To get a sense of the larger objective and whether that will affect what we see and believe in the inflation data, I spoke with veteran economic journalist Shankkar Aiyar and began by asking him if the current index was representative of what was happening in the economy ?
INTERVIEW TRANSCRIPT
Shankkar Aiyar: I think the current index is not completely representative, because it sort of ignores the new pattern of expenditure of people in education, in health, in travel. So it doesn't sort of focus on the rise in prices or costs of people when they address issues at home, for instance, rent. For instance, owner equivalent rent, whether it's placed there. The other thing is that consumption patterns at home, of what we have on our Thali, have also changed, and it may not necessarily reflect the costs that are so as you know, that CRISIL puts out this vegetarian and non vegetarian thali prices, and there's quite a bit of divergence in that. So I think these factors need to be taken into account when they reconstitute the CPI. I mean, the golden rule here is that what you measure well can be improved.
Govindraj Ethiraj: Got it. So if you were to now look at, let's say food now, food inflation is very high. Now one of the proposals is that we remove food from that computation. I mean, which may be a little dramatic, but let's say the food component comes down. Does that in your mind or assessment, change things? And to what extent, If it does
Shankkar Aiyar: So, roughly, for about 10 years now, it has been argued that the in the consumption basket of the average Indian, the weight, age of food, the amount of money that they spend on food, has come down from maybe over 55% to under 50% or 45% now the thing here is that, how consistent is that data, how geographically uniform is that data, this might have spikes now per person staying, say, in an urban Metro like Mumbai, may be spending less, but they are spending on services to get those get that food home delivered, or services like Amazon to get that delivered. How do we factor that in? So these are sort of complex interlinkages that have to be sort of so we might be well placed now to reconfigure the CPI in terms of what is the actual spending on what product, and then update the services part of it, so it reflects the real consumption of people, and therefore we get a better idea of inflation.
Govindraj Ethiraj: So if you were to now take a step back, and I guess this is more intuition, or this is also intuition, are CPI numbers or inflation numbers reflecting what the majority of this country is feeling at this point of time or experiencing?
Shankkar Aiyar: But the question is contextual. If I go to the bazaar today and buy vegetables and fruits, I do feel that inflation is very high, but if I shop on discount retailers, maybe I don't feel that so much. So a lot of it depends on the experiential what is important is the farm gate prices and the market prices. There's a wide divergence. I mean, in most perishables, that is the case. I mean, you can't buy any fruit in India less than a three digit cost. So, I mean, you know, that's kind of sad, considering that India is the largest producer of foods and vegetables in in the world. So question that we are wrestling with is whether the CPI, as we see the industrial worker, the agricultural worker and others, needs to be reframed into CPI for Metro CPI for income classes or CPI for social groups. Maybe that's the way to sort of frame this issue of whether it reflects, I don't think the current CPI is adequately representative of the costs faced by Indians, whether in cities or in villages.
Govindraj Ethiraj: Right? So all of this is going to come together or happen only by Jan 2026, from what it appears or what has been reported. Is this something that, let's say, the policy maker ecosystem can wait for or and till then. How are we taking our decisions or even calibrating our, let's say, interest rate responses,
Shankkar Aiyar: I mean, the world over, this is a question that central bankers are wrestling with, is that they are expected to address that which they cannot address, whereas, basically, inflation targeting has its own limitations, just like there is a limit to how much you can push a threat here, what is expected is that central banks should bring down through their monetary policy measures, costs of products, goods, food that are supply constrained. For instance, the Reserve Bank of India can do very little to bring down the prices. Vegetables and food grains, in a sense, what it also sort of reflects is that the current CPI does not reflect the free food program. I don't know how they factor that in in the CPI calculation. Now, if the RBI is expected to bring down the prices of crude oil, if they go up in the global markets, is very difficult, and no central bank can address issues that are supply constraint. They can only address the demand part of the equation, which is why it is a very blunt instrument. So what policy makers are sort of toying around is to see whether that which is supply constraint can be kept out of the basket.
Govindraj Ethiraj: So Shankkar, let me come back to the comment from the chief economic advisor last month, which said that the central bank's inflation target should exclude food. And what's your sense?
Shankkar Aiyar: I find it a little problematic this suggestion that targeting should exclude food because food prices and fuel prices have a tendency to seep into wages now, unless they can prove it to the contrary, that this is not happening and wages sort of creep into the core inflation. So if you see the alignment once food prices go up, workers want higher prices, the DNS allowance of governments is adjusted to cost, and in a similar way, it sort of seeps into the wages. Wages impact core inflation. So I find it problematic that this, maybe there is an argument to be made that central banks are unable to address issues that are supply constraint, for instance, food prices or petrol prices or gas prices. So maybe there is a but this is easier to address if we look at, if the Reserve Bank, for instance, formulates its interest rate policy looking at the core inflation. Why do you have to sort of declare anything, or announce anything on whether this should be in the targeting or not in the targeting. I mean, you know, it's the composite picture that the RBI has includes all the factors of the financial markets and the real economy. And it should take a call. I think this requires some more study. I think my my trouble is, I mean, rather, my worry is that sometimes in India, we in trying to solve one issue, we create other problems. So I hope that is not the case here.
Govindraj Ethiraj: Shankkar, thank you so much for joining me.
Shankkar Aiyar: Thank you, Govind.
