Supreme Court Directs Probe into Hindenburg Research
- January 5, 2024
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Supreme Court Directs Probe into Hindenburg Research
Subject: Economy
Section: Capital Market
- Investigation Order:
- The Supreme Court has directed the Securities and Exchange Board of India (SEBI) and investigating agencies to probe the conduct of Hindenburg Research.
- The investigation aims to determine if the losses suffered by Indian investors due to Hindenburg’s short position in Adani group entities involved any legal violations.
- Background:
- Hindenburg’s report alleged that the Adani group manipulated share prices and violated regulations by not disclosing transactions with related parties.
- Court’s Observation:
- The court noted that the volatility in Adani stocks had an impact at an individual level but did not pose a systemic market-level risk.
- It emphasized that the SEBI investigation into the Adani group was comprehensive and inspired confidence.
- SEBI’s Investigation:
- SEBI had completed 22 out of 24 investigations into the Adani group following the Hindenburg report.
- The remaining two were pending due to awaited inputs from foreign regulators.
- The court ordered SEBI to expedite the pending investigations, preferably within three months.
- The court dismissed contentions that SEBI’s amendments in Foreign Portfolio Investors (FPI) Regulations and Listing Obligations and Disclosure Requirements (LODR) Regulations hindered the investigation. It noted that such claims lacked merit and did not challenge the validity of the regulations.
- It emphasized that such reports could serve as inputs but should not be regarded as conclusive proof of the inadequacy of SEBI’s investigation.
- Conclusion:
- The Supreme Court’s judgment underscores the need for a thorough investigation into the allegations made by Hindenburg Research and emphasizes the role of regulatory authorities in ensuring market integrity.
Hindenburg Research’s Accusations Against Adani Group: A Comprehensive Overview
Hindenburg Research:
- Hindenburg Research is a US-based investment research firm.
- Specialization: It specializes in forensic financial research, aiming to uncover corruption, fraud, and irregularities in the business world.
- Firm founded in 2017.
Short Selling:
Short selling is the sale of a security or share that the seller does not own.
Process: In short selling, an investor sells borrowed shares with the expectation of buying them back at a lower price later.
Opposite of Traditional Investment: Unlike traditional investments where an investor buys shares with the hope that their value will rise, short selling profits from a decline in the stock’s value.
Borrowing Shares: Investors do not need to own the shares they sell short; instead, they borrow shares from brokers or dealers.
Hindenburg’s Allegations Against Adani Group:
- Nature of Allegations: Hindenburg Research accused the Adani Group of engaging in stock manipulation and accounting fraud.
- Controlled Entities: Hindenburg claimed that the Adani family controlled offshore shell entities in tax havens, from the Caribbean and Mauritius to the United Arab Emirates.
- Accusations: The alleged activities involve corruption, money laundering, taxpayer theft, and siphoning off money from the group’s listed companies.
Investigation by SEBI on the directions of Supreme Court: –
- SEBI’s investigation into the Adani-Hindenburg matter, directed by the Supreme Court in March 2023.
- Similar allegations by the Organized Crime and Corruption Reporting Project (OCCRP) against the Adani Group.
SEBI’s Investigation:
- Supreme Court-directed investigation into Rule 19A violations, non-disclosure of related party transactions, and stock price manipulation.
- OCCRP alleges Mauritius-based funds linked to the Adani family invested in Adani companies’ stocks.
OCCRP’s Allegations:
- OCCRP report alleges stock manipulation by the Adani Group.
- Exclusive documents indicate Adani family-connected investors influencing stock prices.
About OCCRP:
- Global network of investigative reporters founded in 2006.
- Focus on investigating organized crime and systemic corruption.
- Over 150 journalists in 30 countries, collaborating with global partners.
Rule 19(A) of the Securities Contracts (Regulation) Rules, 1957:
- Rule 19(A) is a provision under the Securities Contracts (Regulation) Rules, 1957, which falls under the regulatory framework of the Securities and Exchange Board of India (SEBI).
- The rule is designed to prevent concentrated ownership and promote liquidity in the securities market.
- Mandates listed companies to maintain a minimum of 25% public shareholding.
- Ensures sufficient shares for trading and promotes price discovery.
Rule 19A Violations:
- Five listed Adani companies violated Rule 19A, suspected FPIs were front companies for Adani promoters.
- SEBI unable to establish prima facie contraventions due to regulatory loopholes.
Regulatory Amendments:
- Amendments to FPI and LODR regulations in 2018 and 2019 opened loopholes, allowing concealment of ultimate beneficiaries.
- Subsequent amendments in November 2021 sought to plug regulatory gaps but had deferred prospective effects.
FPI Rules and Disclosure:
- Changes in FPI rules in 2018 eliminated the requirement for disclosing “ultimate natural person.”
- SEBI’s challenges in obtaining evidence due to repealed provisions and compliance by FPIs.
IPO (Initial Public Offering):
An Initial Public Offering (IPO) is the process through which a private company offers its shares to the public for the first time, allowing it to raise capital from external investors.
- Process:
- The company hires investment banks to underwrite the offering.
- Approval is obtained from SEBI.
- Shares are offered to the public through various channels like stock exchanges.
- Investors can buy shares, and the company becomes publicly traded.
FPO (Follow-on Public Offering):
A Follow-on Public Offering (FPO) occurs when a company that is already publicly traded issues new shares to the public.
Process:
- Similar to an IPO but involves a company that is already listed on a stock exchange.
- New shares are offered to existing and new investors.
- The company works with investment banks to facilitate the offering.
Free Float:
Free float refers to the portion of a company’s shares that are held by public investors and are available for trading on the open market.
Calculation:
- It includes shares held by individual and institutional investors but excludes shares held by insiders, promoters, and strategic investors.
- Usually expressed as a percentage of the total outstanding shares.
- Importance:
- A higher free float increases liquidity, making it easier to buy or sell shares in the market.
- Stocks with a smaller free float may experience higher price volatility.
- Larger free float can contribute to a more stable stock price.
Securities and Exchange Board of India (SEBI)
- Introduction:
- SEBI is the regulatory authority for the Indian securities market, established on April 12, 1992, by the SEBI Act 1992.
- Its primary goal is to promote transparency and safeguard investors’ interests in the Indian capital market.
- History:
- Before SEBI, the securities market was regulated by various government institutions, leading to inconsistency.
- To conduct search and seizure operations and impose stricter punishments for market manipulation and insider trading.
- Objectives:
- Regulating the functioning of the Indian capital market.
- Safeguarding investors’ interests.
- Creating a safe investment environment through rules and regulations.
- Preventing malpractices in the Indian stock market.
- Functions and Powers:
- Functions:
- Protecting investors’ interests.
- Promoting the development of the securities market.
- Regulating business operations in the securities market.
- Serving as a platform for various market participants.
- Educating investors about securities markets.
- Prohibiting fraudulent and unfair trade practices.
- Monitoring company takeovers and share acquisitions.
- Ensuring the efficiency and up-to-date nature of the securities market.
- Powers:
- Passing judgments in cases of fraud and unethical practices.
- Examining financial records and gathering evidence against violations.
- Formulating rules and regulations to protect investors’ interests.
- Eliminating malpractices in the securities market.