Adani case: Will undertake enforcement action if found necessary, SEBI tells SC

Adani group

The Securities Exchange Board of India (SEBI) is already enquiring into the allegations made against the Adani group in the Hindenburg report as well as the market activity in the stock before and after its publication, the regulator told Supreme Court in a note.

The note, which was circulated during the hearing of public interest litigations (PILs) pertaining to the controversy, says that the enquiry was launched to identify violations of SEBI Regulations including but not limited to SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, SEBI (Prohibition of Insider Trading) Regulations, 2015, SEBI (Foreign Portfolio Investors) Regulations, 2019, Offshore Derivative Instruments (ODI) norms, short selling norms, if any.

According to the note, since the matter is in the early stages of examination, it may not be appropriate to list details about the ongoing proceedings at this stage.

The note states that the current issues are ‘entity level issues’ and have had a significant impact at the ‘entity level and warrant detailed examination by the regulator, which has already been actioned.

According to the note, “Dealing with such unusual events at a specific company/group level is a matter of surveillance and enforcement action if found necessary after detailed examination, which SEBI and Stock Exchanges would undertake in terms of the existing Regulatory framework.”

The note said, “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. 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.”

According to the note, the short sellers then buy the shares/bonds at lower prices, thus making a profit. The more the market believes their reports, the more that “stop loss limits” get triggered, the more the prices of the bonds/shares fall and the more money they make.

It may be noted that the Group under discussion has several listed companies in India other than two recent acquisitions, the note said.

According to the note, “During the time there was significant rise in share prices of the companies of the Group, SEBI’s Additional Surveillance Method (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 advice to investors in terms of the higher level of risk related to the higher level of volatility in those shares.”

The Group has a number of US dollar-denominated bonds listed in the overseas market, the note said. The note said that Hindenburg in its report has said that its short positions in the Group are in USD bonds in overseas markets and non-Indian traded derivatives.

According to the note, the events that are mentioned in PILs pertaining to the Adani-Hindenburg row are related to one set of entities in the market and have not had any significant impact at the systemic level.

The note said, “While the shares of the Group have seen a significant decline in prices on account of selling pressure, the wider Indian market has shown full resilience. The combined weight of the Group companies in Sensex is zero and in Nifty is below 1 percent.”

Indian markets have seen far higher turbulent times in the past, especially during the Covid pandemic period, where Nifty fell by around 26 percent during the period of March 02, 2020, till March 19, 2020 (13 trading days) the note said.