Viceroy Report: Proxy advisory firm flags unregulated entities not adhering to Indian rules

New Delhi: Proxy firm InGovern has released a report outlining the modus operandi of certain foreign short-sellers who start taking positions in target companies and make gains from the fall in their stock price once the report is released.

"Foreign research outfits not registered with Sebi can publish reports on Indian companies without being subject to Indian regulatory scrutiny -- even when their actions directly impact Indian investors and markets," it said.

The report came in the backdrop of US-based Viceroy Research calling billionaire Anil Agarwal-led British firm Vedanta Resources a "parasite" that is "systematically draining" its Indian unit, an allegation which the group called "selective misinformation and baseless" aimed at discrediting it.

InGovern said short seller reports have become significant market events, often resulting in heightened volatility and intense scrutiny of targeted companies.

These firms first establish a short position in the securities of a company, which is followed by publishing a critical or adverse research report. The report often triggers market reactions, sometimes bordering on panic. Short sellers benefit financially from subsequent movements in stock or bond prices.

In India, the Securities and Exchange Board of India (Sebi) has established a regulatory framework for research analysts. Entities and individuals who publish research on Indian securities are required to be registered with the regulator, ensuring a degree of accountability and oversight regarding the quality and intent of published research.

"These regulations are designed to protect investor interests and promote market integrity by holding registered analysts to professional and ethical standards," InGovern said.

Citing recent reports against Indian groups, it said instances have emerged where offshore research firms released critical reports while holding economic interests in the securities, yet did not respond to regulatory summons or cooperate with Indian authorities.

The reference was to another US short seller, Hindenburg Research, which in January 2023 released a damning report against the Adani Group. Hindenburg, which has since shut shop, did not respond to summons issued by Sebi.

"Indian regulators can enforce compliance and accountability among domestic research analysts, but have limited recourse against unregulated foreign entities. This creates a regulatory gap, allowing such firms to influence Indian markets without adhering to the same standards of transparency," InGovern said.

"The accuracy of these reports is often debated, but the incentive structure -- where financial gains are tied to negative market outcomes-- raises concerns about motives, with market disruption sometimes prioritised over balanced analysis." Calling for a need for stronger safeguards, it said these dynamics highlight the importance of ongoing dialogue around disclosure norms, cross-border regulatory cooperation, and enhanced investor education as global capital markets become increasingly interconnected.

InGovern has said that as an independent proxy advisory firm, it has made recommendations in the past for supporting and opposing various resolutions at Vedanta Group companies, depending on the nature of the proposal and the prevailing governance standards.

"Routine resolutions such as adoption of financial statements or reappointment of auditors have generally received support when disclosures and processes met regulatory and best-practice standards," it said.

On the proposed demerger of Vedanta, InGovern has noted that it was supported by leading proxy advisory firms (including InGovern) all of whom recommended a vote in favour of the demerger.

"These advisors cited potential benefits such as enhanced management focus, improved capital market access, and the opportunity for investors to hold shares in businesses with distinct investment profiles. The demerger is designed to unlock value, sharper strategic focus for each business, and provide flexibility for future growth and collaboration with investors and partners, including the possibility of sale of any of the demerged entities," InGovern said.

On the Viceroy report's observations on entity structures, InGovern has stated that such structures are quite common and legitimate.

"Infrastructure, mining, and energy businesses require large upfront investments and often operate through holding company structures for regulatory, tax, and operational reasons," it said, adding that parent companies often raise debt at the group level (sometimes at more favourable rates) and use subsidiary cash flows for servicing, which is disclosed and regulated.

"This model is not unique to India -- most large conglomerates globally use similar structures, as seen with Glencore, Anglo American, and BHP," it said.

InGovern has also highlighted how various regulatory norms in India require ample disclosures for companies, which helps provide information to stakeholders.

"Indian regulations (SEBI, Companies Act) require comprehensive disclosure of related-party transactions, inter-corporate loans, and dividend flows." Vedanta Group had denied the claims in the Viceroy Report, stating that the report is a malicious combination of selective misinformation and baseless allegations to discredit the Group.