SEBI To Supreme Court: Probe Underway On Hindenburg Claims Against Adani Group, "No Significant Impact” On Market Due To Crash In Its Share Price

India's market regulator Sebi (Securities Exchange Of India) has told the Supreme Court that it is inquiring into allegations made in the Hindenburg report against the Adani Group as well as the market activity immediately preceding and post the publication of the report to identify any violations of its regulations.

During a hearing today by the apex court on volatility in Adani stocks, the regulator disclosed the matter was in the early stages of examination, so it may not be appropriate to list details about the ongoing proceedings at this stage.

It has also told the apex court that it has a “robust set of frameworks and market systems” to ensure seamless trading and deal with the volatility in stock exchanges, while asserting that developed securities markets world over recognise short selling as a “legitimate investment activity”.

The Hindenburg report, which accused the group of stock manipulation and fraud by using a wave of shell firms, caused a massive rout in the shares of Adani Group companies.

Sebi also informed SC that Hindenburg is a short seller research company among other such companies in the US and they 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," the regulator told the SC. Sebi further said that the more the market believes their reports and the more that “stop loss limits” get triggered, the more the prices of the bonds/shares fall and the more money they make. 

'Short selling is considered by some to be a desirable and an essential feature of the securities market, as it provides liquidity and also helps price corrections in overvalued stocks.

''Thus, any restrictions on short selling, per se, may distort efficient price discovery, provide promoters unfettered freedom to manipulate prices, and favour manipulators rather than rational investors,'' it said, adding others consider it an undesirable activity that flourishes on distressed selling and is vulnerable to its own form of manipulation.

Securities market regulators in most countries, particularly in all developed securities markets, recognise short selling as a legitimate investment activity.

''Thus, in all major jurisdictions, instead of prohibiting short sales per se the regulators have permitted it to take place within a regulated framework,'' SEBI said.

The International Organisation of Securities Commissions (IOSCO) has also reviewed short selling and securities lending practices across markets and has recommended transparency of short selling, rather than prohibiting it.

''India follows this policy of regulated short selling and has framed its regime accordingly,'' it said, detailing the framework for regulating short selling in Indian capital markets.

Commenting on the likely impact of the fall in Adani stocks on the Indian market, Sebi said while the shares of the troubled group have seen a significant decline in prices on account of selling pressure, the wider market has shown full resilience.

The combined weight of the group companies in Sensex is zero and in Nifty is below 1 per cent, the regulator said. 

Asserting that the recent impact on the securities market due to the Adani Group shares crash did not have “significant impact”, the regulator said, “Indian markets have seen far higher turbulent times in the past, especially during the Covid pandemic period, where Nifty fell by around 26 per cent during the period of March 2, 2020, till March 19, 2020 (13 trading days). In view of the heightened market volatility, Sebi, on March 20, 2020, reviewed its existing market mechanisms and and introduced a few changes”.