Short Selling in Adani shares led to substantial gains for select FPIs

Short Selling in Adani shares led to substantial gains for select FPIs

Subject :Economy

Section: Capital Market

Context::ED investigation report finds huge gains made by 12 FPIs engaged in short-selling Adani stock during the Hindenburg controversy.

Key Points:

• The Enforcement Directorate (ED) has concluded, after a preliminary investigation into the Hindenburg Research report and the subsequent market crash, that 12 companies including foreign portfolio investors and foreign institutional investors (FPIs/ FIIs) based in tax havens were the “top beneficiaries” of short selling in shares of Adani Group companies.
• The short sellers allegedly took positions just 2-3 days before the Hindenburg Research report was published.
• The FPIs have made profit in thousands of crores. None of the FPIs/ FIIs have disclosed their ownership structures to Income Tax authorities.
• Transactions and income tax data throw up the possibility of the FPIs and FIIs not being the “end beneficiaries” of the gains made from short selling, but actually acting as brokers for bigger players located overseas.
• What is short selling?
  • Short sellers are investors who believe and bet share prices will fall; they borrow shares to sell and buy them back later at a lower price, thus making a profit in the transaction.
  • Domestic investors as well as FPIs/ FIIs registered with SEBI are allowed to trade in derivatives — instruments that allow investors to hedge the market risks by taking short positions.
  • SEBI allows regulated short selling and believes that restrictions may distort efficient price discovery, provide promoters unfettered freedom to manipulate prices and on the contrary, favour manipulators.