On Adani Row, Center tells the Supreme Court how short sellers make profits

New Delhi:

The center told the Supreme Court today that short selling firms in the US “research companies that they believe have governance and/or financial problems” and publish reports that can trigger an avalanche of stock and bond selling. The SEBI, the market regulator Securities and Exchange Board of India, is investigating the allegations made in the Hindenburg report about Gautam Adani’s firms and market activities before and after the report to identify violations of its regulations, she added.

This is the center’s first statement on the massive dispute between Adani and Hindenburg, which has cut investor funds by tens of millions of rupees and sparked a massive political storm.

The report was filed in response to a Supreme Court ruling last Friday. The bank, headed by Chief Justice of India DY Chandrachud, had sought input from the Treasury and others on various issues, including setting up a regulatory mechanism to protect investors’ interests.

It may be noted that Hindenburg is a short seller research firm among other companies in the US that conducts research on companies that they believe have governance and/or financial issues. Their strategy is to take a short position in bonds/stocks of such companies at prevailing prices (ie sell the bonds/stocks without actually holding them) and then publish their reports. If markets believe the reports, bond/stock prices will start falling,” the center said in the report, which was presented to the Supreme Court today.

“Once the fall starts, other institutions that have ‘stop-loss limits’ will also start selling their bond/stock holdings, whether they believe the report or not, thus unleashing a downward spiral in bond- /stock prices.The short sellers therefore buy the stocks/bonds at the lower prices and make a profit bonds/stocks and the more money they make,” the report said.

“As the matter is at an early stage of investigation, it may not be appropriate to list details of the ongoing process at this stage,” the center said.

Potential violations being investigated by SEBI include the Prohibition of Fraudulent and Unfair Trading Practices, the Prohibition of Insider Trading, the Foreign Portfolio Investors Regulations, the Offshore Derivatives Instruments Standards and the Short Selling Standards.

“Regarding the group discussed, it has several listed companies in India alongside two recent acquisitions. During the period in which the share prices of the group companies have risen significantly, SEBI’s ASM framework, which is designed to control excessive volatility in shares (both price appreciation and price decline) has been triggered on numerous occasions over long periods of time, which served as an indication to investors in terms of the higher level of risk associated with the higher volatility of these stocks,” the center said.

“It may also be noted that the group has listed a number of USD denominated bonds on overseas markets. Hindenburg has stated in his report that his short positions in the group are in USD bonds in overseas markets and derivatives not traded in India,” the report added.

Shares in Adani Group companies have plummeted since Hindenburg Research’s Jan. 24 report accusing the group of accounting fraud.

Adani Enterprises denied the allegations, saying the American firm’s conduct was “nothing short of calculated securities fraud under applicable law”.

“This is not just an unwarranted attack on any particular company, but a calculated attack on India, the independence, integrity and quality of Indian institutions, and India’s growth history and ambition,” the statement said.

“Hindenburg did not publish this report out of altruistic reasons, but out of purely selfish motives and in flagrant violation of applicable securities and foreign exchange laws,” it said. “The report is not ‘independent’, ‘objective’ or ‘well researched’.”

(Disclaimer: New Delhi Television is a subsidiary of AMG Media Networks Limited, an Adani Group company.)