Adani-Hindenburg Case: What Happened In The Two Key Issues
SEBI did not find any adverse observation with respect to Adani scrips in the cash segment, though six entities were observed to be involved in suspicious trading.
When the Adani-Hindenburg case reached the apex court, among the many things under scrutiny were two key issues that took prominence:
Is the FPI framework robust enough and whether it needs a relook?
The stock market manipulation before and after the Hindenburg report.
FPI issue
The allegations by Hindenburg and subsequent reports highlighted the alleged relationship between the promoter group and overseas entities, which invested into the Adani companies via an allegedly opaque structure using the FPI framework. This, in turn, it was alleged, allowed Adani Group to maintain financial health and artificially boost the value of stocks in the India market.
The expert committee said that FPI regulations of 2014 did not allow any opaque structure. The subsequent amendment introduced in 2018 ensured that there is a legal standard that issuance of bearer shares will make the FPI structure opaque, and the Ultimate Beneficial Owner was defined as per rules applicable to beneficial owners under the Prevention of Money Laundering Act, 2002.
The expert committee concluded that since the definition of beneficial owners was as per PMLA, and SEBI had reduced the threshold to disclose beneficial owners to anyone holding more than 10% of FPI stake, there was no need to have a requirement to know the ultimate beneficial owner of every single owner of the FPI. While during the investigations the FPIs in question provided the bank statements and details of ultimate beneficial owners of these FPIs, proving that the FPIs and Adani Group entities are independent of each other, the market regulator has been attempting to find who has the economic interest in the FPIs that have invested in Adani stocks.
The expert committee indicated that "this exercise could be voluminous one but potentially a journey without destination". Since then, the market regulator has made amendments that have tightened the regulatory framework by making disclosure requirements mandatory and removing the requirement of disclosure only when sought.
Stock Price Manipulation
The second major issue was related to stock price manipulation. The regulator submitted to the expert committee that the price movement in the Adani stocks had been considered by the exchanges on four occasions and reports were submitted.
Two were in October 2019 to September 2020, and October 2019 to April 2021, prior to the Hindenburg report of Jan. 24, 2023. The other two were for a period after Hindenburg made allegations: May 2021 to December 2022, and October 2022 to February 2023.
These reports did not point to any violation and no evident pattern of manipulation of stock price could be attributed to any single entity or group of connected entities.
SEBI did not find any adverse observation with respect to Adani scrips in the cash segment, though six entities were observed to be involved in suspicious trading. These included four FPIs, one individual and one body corporate. The investigation pointed to suspicious trading pattern due to a build-up of short positions by these entities in the Adani scrips prior to the Hindenburg report and substantial profit earned by them by squaring off the positions after the report. SEBI is undertaking detailed investigation on this front, said the expert panel in its report.
In its submission to the apex court, SEBI has defended the need for short selling mechanism, saying that any restrictions may distort efficient price discovery, provide promoters unfettered freedom to manipulate prices, and favour manipulators rather than rational investors.
The apex court has relied on the statement of the Solicitor General that measures to regulate short selling will be considered by the government of India and SEBI.
The court also asked SEBI and the investigative agencies of the Union government to enquire into whether there was any infraction of law by the entities that engaged in short selling on this occasion. The loss, which has been sustained by Indian investors as a result of the volatility caused by the short positions taken by Hindenburg Research and any other entities acting in concert with Hindenburg Research, should be probed, the top court said.
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