Which, actually, is not either of the rules they cited. This was ruled under section 26, and the card mitigated under 33.
Looking at Rule 20-1-b addressing dropping the ball, it must be redropped if...
(vi) rolls and comes to rest more than two club-lengths from where it first struck a part of the course; or
(vii) rolls and comes to rest nearer the hole than:
(a) its original position or estimated position (see Rule 20-2b) unless otherwise permitted by the Rules; or
After reviewing this, and looking at the slope of the ground towards the pin and the water hazard, I don’t think he did anything wrong regarding where he dropped the ball.
Next it is an issue of how many strokes he took by replaying the ball in the water hazard by dropping from his last known lie.