CNBC's Inside India newsletter: Could Hindenburg's latest allegations have wider implications for India?

No one is questioning India's sovereignty, as the world's largest democracy marks 77 years of independence from British colonial rule today.

But — in a topic more suited to this newsletter — some investors have this week been querying whether India's markets watchdog is independent as it performs its regulatory duties.

The Securities and Exchange Board of India (SEBI), equivalent to the U.S. Securities and Exchange Commission, was the subject of short-seller Hindenburg Research's latest attack this week. The U.S.-based hedge fund that bet against Adani group companies in early 2023 has now accused the head of the SEBI, Madhabi Puri Buch, of having a financial interest in one of the parties her agency was investigating.

The short-seller said Buch and her husband held stakes in an offshore fund where a substantial amount of money was invested by associates of Vinod Adani, brother of Adani group chairman Gautam Adani. Buch dismissed the report's insinuations as baseless but did confirm that her husband had a stake in the fund.

Unusually, in this instance, Hindenburg — a short-seller that makes money when stocks fall — is attacking a market regulator, rather than a specific stock.

Except, it kind of is.

On Monday, the first day of trading after the allegations were made over the weekend, Adani group companies initially lost more than $13 billion in market value. By the end of the day, the group's market losses were at $2.4 billion — or 1.2% — while the Nifty 50 index closed flat.

And there are even wider potential implications.

Together, Adani Ports and Adani Enterprises constitute just under 2% of the Nifty 50 benchmark, meaning they can drive the index as a whole — and influence broader investor sentiment.

This means Hindenburg's allegations pose a problem for India's wider investor base, as it affects the country's reputation for regulatory fairness and stability. And all of this comes as India is trying to contrast itself with China, whose rule-makers and enforcers have been criticized for making somewhat arbitrary decisions in recent years.

"The accusations can have a harmful impact if they spark worries over institutional credibility at a time when foreign inflows are volatile and concerns are rising over expensive valuations of the Indian stock market," Shumita Deveshwar, chief India economist at TS Lombard, told CNBC's Inside India.

"The key imperative here for the authorities – whether it is the current SEBI chief or the government at the center – should be to ensure that the stock market regulator's image as an independent, credible institution is upheld."

One way to improve that image is through an "audit that is perceived to be fair," Deveshwar added. The economist also pointed out that as long as the SEBI, as an institution, continues to safeguard small investors, as it has done recently by warning about bubbles, the "fallout of the allegations will be limited."

Others, too, have suggested that the market regulator is more than an individual. The allegations against its chief "shouldn't have much impact on valuations because SEBI processes are institutionalized and are not tied to a specific person," said Rajeev Agrawal, a U.S.-based hedge fund manager and managing partner at DoorDarshi India Fund.

However, investors should not forget that India is an emerging market and carries some inherent risks as a result, according to Mohit Kumar, chief financial economist at Jefferies.

Kumar said that Jefferies remains "structurally bullish" on India despite the accusations against the chief market regulator, as the country has a "growth story with favorable demographics".

"We will get episodes where there are concerns around individual companies but I don't think it derails our medium term bullish view on India," he added.

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Indian stocks lost steam this week. The Nifty 50 index closed 24,143.75 points, nearing a loss of 1% for this week. The index has risen 11.10% this year.

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Meanwhile, Herald van der Linde of HSBC said India and Indonesia have domestic-oriented stock markets and economies, which help them stay "somewhat insulated" from all the global volatility.

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