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Home >Opinion >Views >The role of inefficiency in the Adani stock rout

If anyone needed another reason to scoff at the ‘efficient market hypothesis’, this week’s dizzy swings in Adani Group stocks offered one loaded with drama. All six listed companies of Gautam Adani’s infrastructure and energy group had seen their share prices soar over the past year or so. On Monday, however, they abruptly crashed, losing over a trillion rupees of market value before they recovered about half the day’s losses. The scrips were jolted by speculation that the National Securities Depository Ltd (NSDL) had frozen the accounts of three foreign portfolio investors (FPIs) that held substantial stakes, worth some $6 billion, in those firms. What caused panic was the possibility of Cresta Fund, APMS Investment Fund and Albula Investment Fund, the Mauritius-based trio of FPIs in the spotlight, being placed under some sort of regulatory scrutiny. These FPIs share a common address and have highly concentrated holdings of Adani equity. As the group companies’ shares are not very widely held, their prices are exposed to that much more volatility. Still, what happened was extraordinary. The FPIs and Adani group issued denials of an account freeze, the NSDL confirmed as much, the share prices staged an uneven recovery, and, crucially, no word of any probe emerged. If all this was much ado about nothing, what explains the damage done?

The quality of information that feeds stock valuations in India has always been patchy, but this week’s episode highlights some gaps that need to be addressed. Take public data on official websites. While the NSDL clarified that the demat accounts of the FPIs that held the Adani shares were ‘active’ and thus not barred from trading, the three were spotted in the frozen accounts category on its website, the result of a five-year-old order by the Securities and Exchange Board of India asking for a freeze of specific beneficial accounts that received shares upon cancellation of global depository receipts issued by 51 companies. An Adani notification issued on Tuesday to stock exchanges cited an NSDL communique as saying: “ … the below demat accounts are in the ‘Suspended for Debit’ status in terms of SEBI order… dated June 16, 2016." These accounts seem to have got mistaken for the ones that made investors shudder. It is truly worrisome that NSDL’s website is structured in a way that does not let distinctions be made at a glance. Official platforms that host such market-sensitive data must minimize their scope for misinterpretation and confusion.

How information is processed by market players is another cause for worry. While the heat of trading in the midst of a rout tends to foster snap decisions, with little time for input validation, the nature of our bazaar buzz is such that valid signals can easily get overwhelmed by noise, a problem that is often compounded by circumstantial dots getting joined to create a grainy picture of uncertain reliability. In this case, the fact that most listed Adani firms only scrape past the regulatory minimum of a quarter of all shares needing to be held publicly could have got linked with a false alarm on FPIs. In Adani Enterprises, for example, a 74.9% stake is held by promoters and 20.5% by FPIs, with Elara India Opportunities Fund and the Mauritius trio its top public shareholders. This, unfortunately, means that few inputs go into its price discovery. An ‘efficient market’ that takes into account all relevant data and offers ‘fair’ prices is just a construct of theory. But scrappy information mustn’t make that ideal even more elusive than it already is.

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