Opinion: Hindenburg Report Joins The Pantheon Of Unsubstantiated Smearing

As the Narendra Modi regime gears up for its ninth anniversary celebrations this month end, one of the major areas of focus will be the progress made in infrastructure building, an activity which touches the lives of all sections of society. Infrastructure provides sinews to a nation's economic growth. In the giant strides taken on this front, the contribution of the private sector is significant but not sufficient. India's private sector continues to be wary of treading on less beaten tracks. The port-to-energy conglomerate, Adani Group, accounts for a major share in this nation-building initiative. Larsen & Toubro, Tata and other entities contribute the rest. The government continues to enjoy in the infrastructure sector what Nehruvian economists called, "Commanding Heights". During the dawn of India's Economic Reform, the 8th Five Year Plan (1992-97) had assigned commanding heights to the private sector in the development of the power sector. Like most Planning era dreams, this remained on paper. The Niti Aayog era after 2014 changed the paradigm, though the process is slow and arduous. Private sector participants in the infrastructure sector, who traverse the hitherto unbeaten trail, thus are contributors of growth.

An assault of allegations against the Adani Group surfaced in January after a report by US-based shortseller Hindenburg, which alleged that the group led by Gautam Adani, then the world's third richest man, had carried out brazen stock manipulation and unprecedented accounting fraud. The brouhaha resounded in political circles and in parliament. According to Bloomberg, the market cap of the Adani Group has declined by Rs 9.85 trillion since January 24. The Securities and Exchange Board of India (SEBI) began investigations post the Hindenburg allegations (which is continuing and the Supreme Court has a desired an update by August 14).

The Supreme Court also appointed a committee of domain experts to probe the matter within a given time frame. On May 19 the Supreme Court disclosed the findings of the Justice AM Sapre-led six-member panel, which said that it had found no violation by Adani entities. After the committee's clean chit, the prices of Adani stocks looked up. According to Bloomberg, the group's market cap appreciated Rs 0.34 trillion. However, the attrition of Rs 10 trillion since January 24 lingers. Adani stocks appreciated seven percent after the Supreme Court panel report's disclosure.

The Hindenburg report abroad and its broadcasters in India had effectively stymied a large infrastructure building group and had also deprived stock market investors of their legitimate earnings.

Interestingly, in April, when there was an international uproar over the collapse of Signature Bank and Silicon Valley Bank, Hindenburg Research was trolled for its silence on the issue. This, after US regulators closed the New York-based Signature Bank - the third largest failure in US banking history - two days after the authorities shuttered Silicon Valley Bank in a collapse that blocked billions in deposits. Hindenburg's silence on its home turf and the frenzy in India over the shortseller's report - which stands discredited after the Sapre panel report - makes for a great case study which business schools may like to undertake.

Commenting on the case, former Solicitor General of India, Mukul Rohatgi, observed that the Sapre report exonerated the Adani group from allegations of rigging in the market." The report suggests that the Adani group had taken mitigating measures in improving and boosting investor confidence and, in fact, the stock price is stable even though it may not have reached the same level as it was before the Hindenburg report on January 24," Rohatgi underscored. He pointed out that the Sapre panel had observed that SEBI has found some entities had taken short positions prior to the publication of the Hindenburg report and profited from squaring off their positions after the price crashed as a result of the Hindenburg "disclosure".

The Sapre committee on the Adani-Hindenburg report has found no violation by Adani group entities. The committee firmly believes that SEBI has remained vigilant throughout the period of price volatility in the Adani group stocks before and after the Hindenburg report. The report provides details of steps taken by SEBI and stock exchanges and answers each and every question in detail.

The committee was appointed to examine the question of regulatory failure on the part of SEBI. Not only that - the committee has found no deficiency in the way the market regulator has handled the issue so far. The report goes on to say that SEBI has gone beyond the scope of prevalent regulations. While examining the issue of violation of minimum public shareholding, where doubts have been raised about 13 overseas entities and whether they relate to the Adani group, the report says "the FPIs ( Foreign Portfolio Investors) in question have made declarations of the beneficial owner by identifying the natural persons controlling their decisions for purposes of the Prevention of Money Laundering Act (PMLA)." Highlighting that in 1978 the PMLA was amended to do away with the need to identify the last beneficiary above every person owning economic interest has been done away with in 2018 under the Act.

Parties have affirmed on oath that FPI investments are not funded by the Adani Group. Yet, SEBI has been investigating the ownership of the13 overseas entities since October 2020 despite the aforesaid legislative change in PMLA that had been effected in 2018.

SEBI in this case extended the scope of investigation to seven different jurisdictions, looking for beneficial owners of these entities. The market regulator also involved the Enforcement Directorate ( ED) and the Central Board of Direct Taxes (CBDT) in the investigation - the probe drew a blank. Therefore, the committee has not found any regulatory failure on this count as well.

Several commentators have attacked the market regulator for not keeping an eye on Adani group stocks when they rose disproportionately over several months. The Sapre committee has provided data on this front as well - a total of 849 alerts were generated by the SEBI systems and each of them was followed up by the stock exchanges. Various patches of up and down moves in the stock prices were examined to see if there was a systematic attempt to manipulate the price. Exchanges have given four reports to SEBI - two prior to the Hindenburg report and two after it. The reports concluded, "In a nutshell, no pattern of artificial trading or 'wash trades' among the same parties multiple times was found". In one of the patches where the price rose, FPIs under investigation were"net sellers." Therefore the Sapre committee has found no evidence of price manipulation and is satisfied with SEBI's efforts and systems.

While answering the question on volatility the committee has concluded that the Indian markets have not been unduly volatile. This conclusion has been scientifically drawn by comparing India Vix with CBOE Vix.(Vix is the ticker symbol and the popular name for the Chicago Board Options Exchange's CBOE Volatility Index, a popular measure of the stock market's expectation of volatility based on S&P 500 index options) The volatility in the Adani Group stocks immediately after the Hindenburg report was clearly attributable to the allegations made in the shortseller's report.

The Sapre committee has taken note of the steps taken by the Adani group and said, "The mitigating measures by the Adani Group such as paring down the debt secured by encumbrances on their shareholding, infusion of fresh investment into Adani stocks by way of investment of nearly $2 billion by a private equity investor and the like, built confidence in the stocks."

As we write these lines stalwarts of Oppostion parties are lining up the podium in Bengaluru to fete the new Congress government in Karnataka. The allegation of India's electoral process being rigged and Electronic Voting Machines being manipulated disappear when the ruling dispensation loses. Since the late 1980s, when VP Singh's Bofors allegations ("paisa khaya kaun dalal") became the credo, India has been fertile ground for unproven allegations. The concept of shoot and scoot, an attribute of the Bofors howitzers which came to India's advantage in the Kargil war of 1999, has been perhaps misused by the opposition from time to time to harp on allegations which, in the long run, did not withstand the scrutiny of courts or of probe agencies. The Hindenburg report perhaps joins this pantheon of unsubstantiated smearing.

(Shubhabrata Bhattacharya is a retired Editor and a public affairs commentator.)

Disclaimer: These are the personal opinions of the author.