SEBI Inquiry Uncovers Profits For 12 Firms Via Adani Shares Short Selling During Hindenburg Report Probe

Amongst the ‘top short sellers’ are also two Indian companies – one registered in New Delhi, against whose promoter SEBI had passed an order for misleading investors and stock market manipulation. The other is registered in Mumbai.

The Enforcement Directorate has concluded, after a preliminary investigation into the Hindenburg Research report and the subsequent market crash, that a dozen 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 Indian Express has learnt.

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.

According to ED, which shared its findings with market regulator Securities and Exchange Board of India (SEBI) in July, some of these short sellers allegedly took positions just 2-3 days before the Hindenburg Research report was published on January 24, and some others were taking short positions for the first time ever.

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.

According to sources, three of the 12 entities are India-based (one is the Indian branch of a foreign bank); four are based in Mauritius and one each in France, Hong Kong, Cayman Islands, Ireland and London. They said none of the FPIs/ FIIs have disclosed their ownership structures to Income Tax authorities.
For instance, one was incorporated in July 2020, and had no business activity till September 2021, and in a short period of six months from September 2021 to March 2022, claimed income of Rs 1,100 crore on a turnover of Rs 31,000 crore.

Another global financial services group, which operates as a bank in India, earned just Rs 122 crore, but as an FII earned “whopping income of Rs 9,700 crore” without any income tax.
The parent company of a Cayman Islands FII, one amongst the dozen ‘top beneficiaries’ had pleaded guilty of insider trading and paid a fine of $1.8 billion in the US. In fact, this FPI took a short position in Adani Group scrips on January 20, and enhanced it further on January 23. Another Mauritius-based fund took a short position on January 10 for the first time.