Adani case: Stock rout ‘manipulated’ abroad; SC to hear plea on Friday
Virendra Pandit
New Delhi: While a fresh investigation revealed that the USD 100 billion stock rout within a week in Adani Group companies started in India as a domino effect following ‘manipulated’ short-selling overseas, the Supreme Court agreed to hear on Friday a plea seeking a probe into the Hindenburg Research’s controversial reports in the case.
The Adani Group has already dismissed all charges as lies, saying it complies with all laws and disclosure requirements. In a 400-page rebuttal, it said the Hindenburg claims were a “calculated attack on India.”
The apex court will hear on Friday a plea seeking a direction to the Centre to constitute a committee monitored by a retired Supreme Court judge to inquire and investigate the Hindenburg report which on January 24 made a slew of allegations against the business conglomerate led by industrialist Gautam Adani.
The petitioner, advocate Vishal Tiwari, mentioned the matter for urgent listing before a bench headed by Chief Justice D Y Chandrachud on Thursday. He told the bench, also comprising Justices P S Narasimha and J B Pardiwala, that a separate plea filed on the issue is scheduled to be listed for hearing on February 10, and urged that his plea be also heard on Friday along with it.
In his public interest litigation (PIL), Tiwari also sought directions to set up a special committee to oversee the sanction policy for loans of over Rs. 500 crores given to big corporates, the media reported on Thursday.
Last week, another PIL filed in the apex court, by advocate M L Sharma, sought prosecution of short-seller Nathan Anderson of US-based firm Hindenburg Research and his associates in India and America for allegedly exploiting innocent investors and the “artificial crashing” of Adani Group’s stock value in the market.
The Adani Group stocks took a beating on the bourses after Hindenburg Research made a litany of allegations, including fraudulent transactions and share-price manipulation, against the business conglomerate.
Investigations revealed that New York-based Hindenburg Research is not even a registered research firm with any market regulator. Its controversial report claims to have received information on SEBI investigations into Adani stocks via the Right To Information (RTI) application. But SEBI never shares any investigation-related information via RTI.
Recent probes, the media reported, have focused on Hindenburg’s revelation that it “held short positions in Adani companies through bonds and non-Indian-traded derivative instruments.”
This triggered a tsunami of short-selling bets ‘outside India’ which, in turn, led to the stock rout worth USD100 billion in the share price of Adani firms in India.
In other words, the reports hinted, a manipulated selling of the Adani stocks at a lower price overseas, panicked the Indian stock market investors and its domino effect led to the rout. Hindenburg may have done a hatchet job for those who wanted to see the Adanis down and potentially create trouble for the Narendra Modi government.
An initial probe by government agencies revealed that the bear cartel targeted the Adani companies through the use of Structured Product Derivatives (SPDs). These are potent stock market instruments, tailor-made by foreign brokers for large clients in offshore jurisdictions. These SPDs are like controversial participatory notes since the identity of the actual clients remains camouflaged unless the regulators disclose them.
According to India’s tax and SEBI laws, short-selling domestic stocks outside the country’s jurisdiction is illegal unless they are listed on any exchange. But the latest probe reveals that billions of dollars worth of trading took place in Adani group stocks outside the country, which had a domino effect on India-listed shares as the volatility increased.
The biggest clue of the overseas short-selling in Adani stocks came from Hindenburg itself, which claimed to have targeted the group citing fraud and sky-high valuations.
While Adani bonds are listed on the US exchange, Hindenburg’s reference to the ‘non-Indian-traded derivatives’ raised the alarm for Indian regulators. These derivatives are the SPDs, without which there wouldn’t have been selling in Adani shares in India. The reason was: over 90 percent of the float was held by promoters, entities close to them, and domestic institutions.
The fresh probe revealed that the ‘operation’ to short-sell Adani shares might have actually begun several weeks ahead of the Hindenburg report. It was published on January 24, just a day before the monthly derivative market expiry in India and a week ahead of the Union Budget, when market volatility is usually high. Reports can spoil the sentiments but for a fall of the magnitude seen in Adani companies, huge positions were required, which Hindenburg and its cohorts got in SPDs.
The media reported there was frantic trading in NSE’s equity options segment from December 2022 up to the Union Budget (February 1). As a result, the ratio of Put options, which investors buy when they anticipate a market crash, kept rising steadily and touched a 13-year high on January 24, the day Hindenburg published its report. High action was seen in out-of-the-money Put options of Adani stocks, which means some were already anticipating a sharp fall.
On February 1, when Finance Minister announced tax breaks and high exemptions in her Budget, the Sensex rose by 1200 points. But short-selling by FPIs ensured that the markets closed in the negative and Adani stocks crashed even before the news came out of the group calling off its follow-on public offer of Rs. 20,000 crores for Adani Enterprises.
The probe showed that Hindenburg’s report follows the same financial and other metrics used by a leading Indian market researcher in his ‘Bespoke’ reports on listed companies that were sold for USD 20,000 to USD 50,000 to private clients.
Market observers say the use of derivative ‘options’ is the most powerful strategy for short-selling stocks and SPDs wield them most effectively. The SPDs can consist of anything in the debt, equity, and commodity domain for short-selling and are sold for one to three-month periods. Investigators suspect Hindenburg played the game of dealing in “non-India-traded derivatives of Adani.” The colossal weight of this overseas short-selling fell on Adani stocks in India, which, despite extremely low floating stock, suffered a historic rout.
