Adani-Hindenburg row

What’s in today’s article?

• Why in news?
• What is Securities and Exchange Board of India (SEBI)? 
• What is Adani-Hindenburg controversy?
• Role of Supreme Court in Adani-Hindenburg controversy
• News Summary: Adani-Hindenburg row 
• Key highlights of the SC Judgement

Why in news?

• The Supreme Court of India has reinforced the Securities and Exchange Board of India's (Sebi) ongoing investigation into the Adani-Hindenburg controversy.

Securities and Exchange Board of India (SEBI)

• About
  • The SEBI is a statutory regulatory body established by the Government of India in 1992. It was given statutory powers through the SEBI Act, 1992.
  • SEBI was established to keep a check on unfair and malpractices and protect the investors from such malpractices.
• Objective:
  • To regulate the securities market in India and protect the interests of investors in securities.
• Powers of SEBI:
• Quasi-judicial powers –
  • In case of frauds and unethical practices pertaining to the securities market, SEBI has the power to pass judgments.
  • The said power facilitates to maintain transparency, accountability and fairness in the securities market.
• Quasi-executive powers –
  • SEBI has the power to examine the Book of Accounts and other vital documents to identify or gather evidence against violations.
  • If it finds one violating the regulations, the regulatory body has the power to impose rules, pass judgements and take legal actions against violators.
• Quasi-legislative powers –
  • To protect the interest of investors, the authoritative body has been entrusted with the power to formulate suitable rules and regulations.
  • Such rules tend to encompass the listing obligations, insider trading regulations and essential disclosure requirements.

Adani-Hindenburg controversy

• About
  • The controversy involves allegations of accounting fraud and stock price manipulation made by Hindenburg Research against the Adani Group.
    • Hindenburg Research is a US-based research team that offers services in forensic financial research, with a focus on equity, credit and derivatives analysis.
• Allegations against the Adani Group by Hindenburg Research
  • The controversy began in January 2023, when Hindenburg Research published a report alleging corporate misgovernance and other charges.
  • The report accused the Adani Group of:
    • Engaging in large-scale stock price manipulation
    • Falsely overinflating the value of their assets
    • Controlling over 75% of their shares through different offshore shell entities controlled by the Group
  • The report accused the Adani group of companies of committing the largest con in corporate history.
• Controversy
  • Soon after the Hindenburg Report was published, Adani Group stocks plummeted by USD 140 billion.
  • Hindenburg Research, however, profited from this crash in prices since it took a ‘short position’ against the Adani Group’s U.S. holdings.
    • Short-selling refers to selling a stock that the seller does not own at the time of the trade, with the intention of buying it back at a lower price later in the future.
    • Short sellers borrow shares and sell them at market value, and buy them back when the share price falls.
    • The difference in value is the profit. To put it simply, a short-seller bets on the price of the stock going down in order to make a profit.
• Why does these allegations matter?
  • The allegations imply that the Indian regulatory framework failed to stop large-scale stock manipulation and accounting fraud over the course of decades.
  • If the allegations are true, it would mean that the Adani Group, and Mr. Gautam Adani, raked in over $100 billion in net worth through illegal means.

Role of Supreme Court in Adani-Hindenburg controversy

• Wide range of petitions filed
  • A wide range of petitions were filed before the SC over the Adani-Hindenburg controversy.
  • One batch of petitions alleged a conspiracy by Hindenburg Research to fraudulently make profits by crashing Adani stock prices.
  • A second batch of petitions sought an investigation by an expert committee to investigate the possibility of fraud by the Adani Group.
    • These petitions alleged that changes to the SEBI Act had provided a shield and an excuse for the Adani Group’s regulatory contraventions and market manipulations to remain undetected.
• Expert committee formed by SC
  • In March 2023, the SC formed a 6-member committee led by Justice A.M. Sapre to investigate the allegations against the Adani group and claims of regulatory failure.
    • An investigation into the claims of regulatory failure implies that the SEBI may be under scrutiny by the SC.
  • At the same time, the Bench also ruled that SEBI may continue to conduct a separate investigation.
• Report of the expert committee
  • In its report submitted in a sealed cover, the expert committee concluded that there had been “no regulatory failure” on the part of SEBI in the matter.
  • However, SEBI sought an extension of its probe citing the complexity of the transactions involved.

News Summary: Adani-Hindenburg row

• The Supreme Court granted three months to SEBI to investigate two out of four cases on a batch of petitions on the Adani-Hindenburg row.

Key highlights of the SC Judgement

• No need to transfer the case
  • The facts of this case do not warrant a transfer of investigation from Sebi.
  • In an appropriate case, this court does have the power to transfer an investigation being carried out by the authorized agency to an SIT or CBI.
  • The Sebi's status report and the details of the 24 investigations do not indicate inaction by the market regulator.
• SEBI to complete the remaining investigation in three months
  • SEBI had completed the investigation in 20 out of the 22 matters in connection with the allegations leveled against the Adani group.
  • It ordered the probe into the two pending cases to be completed expeditiously, preferably within three months.
• SEBI and other agencies to probe Hindenburg Research
  • The court instructed SEBI and the government's investigative agencies to investigate whether the losses faced by Indian investors, caused by Hindenburg Research and other entities taking short positions, involved any legal violations.
  • If violations were found, the court directed them to take appropriate action.

Q1) What is short selling?

Short selling is a trading strategy that involves selling borrowed securities, like stocks, with the hope of buying them back at a lower price. The goal is to profit from a price decline rather than an increase.

Q2) What are quasi-judicial powers?

Quasi-judicial powers are the authority given to administrative officers, bodies, or commissions to determine the rights of those who appear before them. 

Source: Adani-Hindenburg row: Supreme Court refuses SIT probe, says no ground to transfer case from SEBI | Supreme Court Observer | Times of India| The Hindu