MUMBAI (Feb 10): It’s hard to shrug off a big mess, and that’s an awkward lesson India is learning. The latest vote of no confidence in Gautam Adani’s eponymous infrastructure empire comes from a global index provider. MSCI has cut the free-float status of four Adani stocks which will reduce their combined weighting down from 0.4% of the MSCI Emerging Markets Index. It’s another win for U.S. fund Hindenburg Research whose short attack two weeks ago obliterated some $110 billion of equity value, and it follows a decision to remove the tycoon’s flagship Adani Enterprises from S&P Dow Jones' sustainbility indices. The rising tide of foreign scrutiny undermines local efforts to downplay concerns about the group’s governance.

Hindenburg founder Nathan Anderson sees MSCI's move as a validation of his group’s findings of “stock parking” by Adani. It will test domestic reaction which has so far been muted. The Securities and Exchange Board of India, headed by former banker Madhabi Puri Buch, acknowledged unusual price movements this month, but without naming the Adani group. State Bank of India shows none of the nervousness of its overseas lending counterparts, and says it will judge fresh funding proposals to Adani on merit. Meanwhile Finance Minister Nirmala Sitharaman says Indian markets are well governed. Adani has summarily dismissed the short-seller’s claims.

Of course, the easiest outcome for India would be for the storm to abate. Adani is one of the few tycoons willing to build and buy the infrastructure the country needs. Memories of big projects going bust and large loans on those turning bad remain fresh, and that is one reason why India Inc’s animal spirits remain in recovery mode. Hindenburg’s report raises the stakes further because they indirectly accuse the market regulator of being “more inclined to protect the perpetrators than punish them”. SEBI hasn’t responded to those allegations, but they hurt Buch who had established a reputation as a no-nonsense enforcer of market discipline in a country whose stock market is clawing its way on the global investor map.

Adani still appears to have the domestic support he needs but external pressures may continue to rise. The corporate regulator in Australia, where the Indian group operates the Carmichael coal mine, is reviewing Hindenburg’s allegations. If regulatory action reflects political priorities, diplomatic ties between New Delhi and Canberra - including the duo’s role in the “Quad” – an implicit China containment alliance - might help limit the fallout. But the longer the controversy drags on, there will be a fat tail risk for Adani and all his stakeholders.