Economic Highlights

New Delhi, 8 January 2024

SEBI Overturns Hindenburg

US CONCURS WITH ADANI GROUP

By Shivaji Sarkar 

The Supreme Court decision denying a special investigation team (SIT) probe into the Hindenburg report on Adani group of companies has not come as a surprise. The Securities and Exchange Board of India (SEBI), stock market watchdog, stand helped the process. 

On January 3, the SEBI leveraged the Supreme Court verdict to its advantage. On January 5, it addressed the primary concern raised by the Hindenburg report regarding short selling, deeming it a non-issue. It has allowed short selling of share as institutional and made disclosure of such trade’s mandatory. It justifies any activity of such proportions any time. The Adani Group or anyone else for that matter is now free to do it. The legal acceptance of short selling shares, which led to Parliament logjams, widens the canvas. 

More interestingly only a month back on December 5, 2023, the US government said, “short-seller Hindenburg Research’s allegations of corporate fraud against billionaire and Adani Group Chairman Gautam Adani weren’t relevant and did not impact the US decision to grant $553 million for a Sri Lankan port terminal”. The US would not invest if it was not sure of its investments being safe. In fact, the US has never given importance to the Hindenburg report. 

Shortly after the report came out on January 30, 2023, the Adani Group damned the allegations, terming it “nothing but a lie” and said it was a “calculated attack” on India. After the top court’s verdict, the group says the report was driven by “an ulterior motive” to “create a false market to allow the US firm to make financial gains”. 

The similarity of the approach of the US government, the Adani group, silence or no surprise over the official system in India, and all attributing the fault to the Hindenburg researcher may not be a coincidence. Except vague charges, nothing concrete has been told about the researcher. The SC has not differed from its observation of May 20, 2023, when its appointed panel said, “Prima facie there’s no manipulation by the Adani group”. 

Hindenburg released a comprehensive report accusing the Adani Group of long-standing malpractices ranging from stock valuations to offshore shell entities. The exposé came just before the Adani Group was to launch $100 billion stocks. The gravity of the allegations spurred various regulatory bodies to take notice of it. The SC acknowledged the seriousness and initiated an investigation. 

The SEBI started its probe into market manipulation and fraudulent activities. The opposition parties seized the opportunity to raise questions and demanded answers leading to many logjams and sharp barbs in both Houses of Parliament. Citing the magnitude of the allegations, the Opposition called for a thorough investigation to ensure accountability. 

It led to suspension of Congress leader Rahul Gandhi and later Trinamool firebrand leader Mohua Moitra. On these and host of other issues, even the December winter session of Parliament witnessed uproarious scenes, resulting in unprecedented suspension of 146 MPs. However, despite the top court’s ruling, it remains a raging political issue, which may become volatile in the ensuing 2024 election battle. 

The Hindenburg Report had shaken the Adani stocks. The report said that its two-year investigations reveal that “Rs 17.8 trillion ($ 218 billion) conglomerate engaged in a brazen stock manipulation and accounting frauds over the decades”. It disclosed that it held short positions in Adani company through US-traded bonds and non-Indian-traded derivatives. It alleged Adani improperly using tax havens and expressed concerns about its high debt levels. This sparked a $150 billion meltdown in shares of Adani’s publicly listed companies last year. The shares are still reported to be down by about $47 billion. 

Within a week of the 32000-word report, the Bombay Stock Exchange had deep scars. Investors lost Rs11.8 lakh crore at BSE and Nifty. Bank stocks suffered the worst collateral damage. Ripples continued through the year though now Adani Group claims it made up the losses. The Adani group released a 413-page response to clarify its position and lambasted Hindenburg for using the company reports itself to malign it through short selling “to book massive financial gain through wrongful means at the countless investors”. 

Hindenburg retorted short selling was a part of its research methodology to unravel the manipulations. A short sell is defined as a trading strategy where an investor borrows shares of a stock they believe will decrease in value, sells them, and then hopes to repurchase the shares at a lower price to make a profit. It is not illegal either in the US or in India. 

In May, a Supreme Court-appointed committee in an interim report said it saw, “no evident pattern of manipulation” in the Adani group of companies and there was “non regulatory failure”.  Simultaneously, it cited many amendments the SEBI made between 2014 and 2019. These constrained the SEBI’s ability to investigate. The panel also said that its probe into alleged violation of money flows from offshore entities had “drawn a blank”. Regulators are known to modify rules to widen their ambit. In this case, just the contrary happens.   

Newspapers went to town with many stories. While rejecting the demand for a SIT to go into the allegations, the SC also maintained that the reliance on newspaper articles or reports by third party organisations as the basis for questioning investigation by a specialised regulator does not make sense. It also rejected reports by the Financial Times and the Organized Crime and Corruption Reporting Project (OCCRP), a global network of investigative journalists with staff on six continents, in August. This is reminiscent of the 1950 SC rulings on freedom of Press and expression. It was implied that newspapers are not frivolous publication and editors were supreme in editorial decisions. 

Independent petitioners questioned the amendments by SEBI on foreign portfolio investors (FPI), diluting the requirements of disclosure of beneficial owners. The court on the contrary held that the amendments tightened the regulatory framework. On the 2014 probe by Directorate of Revenue Intelligence (DRI) into stock manipulation by Adani group, through overvaluation of power equipment purchased from a UAE subsidiary, the SC noted the issue had already been settled in favour of the Adani group. 

Senior lawyer Mahesh Jethmalani alleged that a group was filing cases with a political motive at the behest of foreign forces. No judicious system could function with such premise. Judgments apart, there could be different interpretations. It may be a reprieve to a company but socially and financially stock manipulations are grave and sensitive. It raises questions on issues of ethics, morality, and securityof the investors. 

Stock manipulations are not new. These brazenly came to the fore in 1992 and there have since been many shady activities during the last 30 years. The present incident exhibits proliferation of sophisticated operations shaking confidence in opaque manoeuvrings. ---INFA

(Copyright, India News & Feature Alliance)