On Adani Row, Centre Tells Supreme Court How Short Sellers Make Profit

The Centre today told the Supreme Court that short selling firms in the US research "companies that they believe have governance and/or financial issues" and publish reports that can start an avalanche of shares and bonds sale. The SEBI, market regulator Securities and Exchange Board of India), is looking into the allegations made in the Hindenburg report on Gautam Adani's firms as well as the market activity before and after the report, to identify violations of its regulations, it added.

This is the first communication from the Centre into the massive Adani-Hindenburg row that has shaved off several lakh crores of rupees of investors' money and set off a massive political storm.

The report was filed in response to a Supreme Court order last Friday. The bench, headed by Chief Justice of India DY Chandrachud, had sought inputs from the finance ministry and others on various issues including putting in place a regulatory mechanism to protect the interests of investors.

"It may be pointed out that Hindenburg is a short seller research company amongst other such companies in the US that do research on companies that they believe have governance and/or financial issues. Their strategy is to take a short position in the bonds/shares of such companies at the prevailing prices, (i.e., sell the bonds/shares without actually holding them) and then publish their reports. If the markets believe the reports, the prices of the bonds/shares start to fall," the Centre said in the report that was submitted in the top court today.

"Once the fall starts, other institutions who have "stop loss limits", also start selling their holdings of bonds/shares irrespective of whether they believe the report or not thus triggering a downward spiral in the bond/share prices. The short sellers then buy the shares/bonds at the lower prices, thus making a profit. The more the market believes their reports, and the more that "stop loss limits" get triggered, the more the prices of the bonds/shares fall and the more money they make," the report read.

"As the matter is in early stages of examination, it may not be appropriate to list details about the ongoing proceedings at this stage," the Centre said.

The possible violations being investigated by SEBI include Prohibition of Fraudulent and Unfair Trade Practices, prohibition of Insider Trading, Foreign Portfolio Investors Regulations, Offshore Derivative Instruments norms and short selling norms.

"In respect of the Group under discussion, it has several listed companies in India other than two recent acquisitions. During the time that there was significant rise in share prices of the companies of the Group, SEBI's ASM framework, which is designed to control excessive volatility in stocks [both price increase and price decrease] was triggered on numerous occasions, for long periods of time, which acted and served as advise to investors in terms of the higher level of risk related to the higher level of volatility in those shares," the Centre said.

"It may also be noted that the Group has a number of USD denominated bonds listed in overseas market. Hindenburg in its report has stated that its short positions in the Group are in USD bonds in overseas markets and non-Indian traded derivatives," the report added.

Shares of Adani Group firms slumped since the January 24 report by Hindenburg Research which alleged accounting fraud by the Group.

Rejecting the allegations, the Adani Enterprises said the conduct of the American firm "is nothing short of a calculated securities fraud under applicable law".

"This is not merely an unwarranted attack on any specific company but a calculated attack on India, the independence, integrity and quality of Indian institutions, and the growth story and ambition of India," the statement said.

"Hindenburg has not published this report for any altruistic reasons but purely out of selfish motives and in flagrant breach of applicable securities and foreign exchange laws," it said. "The report is neither 'independent' nor 'objective' nor 'well researched'."