Adani Hindenburg Case: SC Verdict on Short Selling

January 9, 2024

GS Paper III Indian Economy

Context: Recently, the SC has pronounced its verdict on short selling related to the Adani Hindenburg Case.

SC has ordered Centre and SEBI to investigate whether the Hindenburg report on Short Selling violates any laws, and if so, to take appropriate legal action.

Adani Hindenburg Case: Key Highlights of SC Order

Refusal to Transfer Investigation: SC has ruled that there is no ground to transfer the ongoing Securities and Exchange Board of India (SEBI) investigation to a Special Investigation Team.
- SEBI has completed 20 out of 22 investigations till now. The SC has directed completing the remaining 2 investigations within 3 months.
Reject OCCRP Report: SC has not accepted the OCCRP report as proof to doubt the SEBI investigation.
- The Organized Crime and Corruption Reporting Project (OCCRP) report provides details of alleged manipulation of stock and accounting fraud against the Adani Group.
Direction Issued to SEBI:
- Ordered Centre and SEBI to investigate whether the Hindenburg report on Short Selling violates any laws, and if so, to take appropriate legal action.
SC Recommendation: It has also provided recommendations related to structural reforms, enforcement and settlement policies, better timelines for initiating and concluding proceedings, the establishment of a financial redress agency, and the creation of a framework for a multi-agency committee.
Previous Investigation: The Justice Sapre Committee was constituted by the Supreme Court on March 2, 2023, to investigate the causal factors and regulatory failure that led to investors losing crores due to volatility in the securities market.
- The report has said there is no evidence of any regulatory failure by SEBI.

What is Short Selling?

Short selling is an investment or trading strategy speculating on a stock’s decline or other security’s price.
It occurs when an investor borrows a security and sells it on the open market, planning to buy it back later for less money.
Short sellers bet on, and profit from a steep drop in the share prices. However, long-term investors seek a rise in the share prices over time.
Purpose: Large investors use short positions to hedge their portfolio when there is a risk of stock prices going down. Other investors also use it for speculation, expecting an exceptional return.
Possible returns: Theoretically, the possible profit can equal the stock price, but the loss can be infinite when share price rises. On the other hand, in a long position, the loss can be equal to the price of the stock, and profit can be infinite.
Pros: It improves market efficiency, liquidity and price discovery. It also promotes investor skepticism and critical thinking as short sellers have a vested interest in exposing corporate malfeasance.
Types of Short Selling
- Naked Short Selling: When traders sell shares before actually obtaining them.
- Covered short selling: Where the seller has made arrangements to borrow the securities before the sale.
Rules Against Short Selling in India
- Naked short selling is not allowed in India and USA
- Only securities that have been allowed by the exchanges to offer futures and options (F&O) contracts are eligible for short selling.
  - Only stocks in 183 out of more than 2000 listed companies are allowed to be shorted.
Recent Amendment by SEBI:

- All institutional investors would have to disclose upfront whether the order they are placing involves short selling.
- Retail traders will also disclose their short trades, but they will have until the end of the trading session to do so.

Source: Business Line