Do it yourself

In my middle school Hindi book, there was a thought-provoking story titled Haar Ki Jeet (Victory in Defeat) written by Sudarshan. The story was about a compassionate priest, Baba Bharti, living in a village temple. Baba’s only worldly possession was his horse, named Sultan. A notorious dacoit, Khadag Singh, took fancy for Sultan and vowed to take it from Baba. He offered to buy Sultan from Baba. But Baba refused to part with Sultan, whom he had raised like his son.

Overcome by desire, Khadag Singh deceitfully stole Sultan from Baba. Kind Baba, did not resist the treachery of Khadag Singh, letting him take Sultan. He, however, requested him not to reveal this incident to anyone. Khadag Singh was baffled by this unusual request of Baba. He asked Baba, “why would you request so?” Baba politely said, “if people come to know about this incident, they may hesitate in helping people in distress”. Moved by Baba’s words and overwhelmed by guilt, Khadag Singh quietly left Sultan in his stable in the temple that night.

The moral of the story is that serving the broader social good is far more important than serving one’s own vested interest. You are a winner if you fight for social good, even if that comes at your personal cost.

I remembered this story last night while reading about the report of Viceroy Research LLC, a Delaware (USA) based investigative financial research group, on the UK based Vedanta Resources Limited (VRL), a holding company of NSE listed Vedanta Limited (VDL).

What reminded me of this story was not just the act of perceived betrayal or the quick reactions it triggered, but the broader impact such actions can have on the trust fabric of society.

Viceroy, in its report, highlighted that the entire structure of VRL is “financially unsustainable, operationally compromised” and that it is susceptible to default on its debt. It also termed VRL a “parasite” living on resources of VDL. The stock market reacted to the report in a knee jerk fashion. The stock of VDL initially fell 8%, but ended the session with a smaller cut. This was in contrast to the market reaction to a similar report by the US based short seller Hindenburg Research LLC, on Adani Group of India, in January 2023. In reaction to the Hindenburg report, Adani group stocks had crashed more than 50%, and many of the group's stocks are still not fully recovered to the pre-January 2023 levels.

The reason for a muted market reaction to the Viceroy report, might arguably be that Hindenburg could not substantiate its allegation, and in the process negatively impacted the credibility of investigative research. From anecdotal evidence gathered in the last one week, I find that the market participants are significantly less willing to accept any such investigative research post Hindenburg episode.

I am not commenting on the merits, or otherwise, of either Hindenburg or Viceroy reports. My concern is about the process. If you make some allegation (of throw and run kind) just to gain from short selling, without possessing ability, or holding an intent, to substantiate such allegations in a court of law, you destroy faith of the society in the institution of investigative research and put the entire investing community at risk of being defrauded by unscrupulous businessmen.

This might also apply to the enforcement agencies which make unnecessary arrests or register frivolous cases, under political pressure or for some other reasons. This practice allows building a narrative that enforcement agencies are “caged parrots” and their actions are always motivated by extrajudicial purposes. This obliterates the stigma of being arrested, motivating fearless white-collar crimes. The criminal conveniently plays the “victim of vendetta” card and gathers sympathy instead of being blemished. Five motivated arrests make ninety-five genuine arrests futile.

The criminals come out smiling and uttering a famous dialogue of 1993 Shahrukh Khan starrer movie Baazigar, “haar kar jeetne waale ko Baazigar kehte hai" (those who win after losing are called Baazigar). Baba Bharti would obviously not like it.

(P.S.: Short-sellers like Hindenburg or Viceroy do spark necessary scrutiny, even if not immediately substantiated in court, by exposing potential risks to investors. Also, in most cases enforcement agencies are not politically driven. But the point is that sometimes even one case could be enough to erode the credibility of the entire process.)