'Probe into Hindenburg report allegations, market activity underway'

NEW DELHI: Amid the Hindenburg-Adani row, the Securities and Exchange Board of India (SEBI) has told the Supreme Court that it is already enquiring into the allegations made in the Hindenburg report as well as the market activity immediately preceding and post the publication of the report.

In a note filed before the Supreme Court, SEBI submitted that it is already enquiring into both, the allegations to identify violations of SEBI Regulations including but not limited to SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, SEBI (Prohibition of Insider Trading) Regulations, 2015, SEBI (Foreign Portfolio Investors) Regulations, 2019, Offshore Derivative Instruments (ODI) norms, short selling norms if any.

SEBI filed the written note in response to the two petitions related to Hindenburg report. One of the petitions was filed by advocate Vishal Tiwari who sought to constitute a Committee under the monitoring of the retired Supreme Court judge to enquire and investigate the Hindenburg Research Report.

Another petitioner, advocate ML Sharma, has sought a probe against the US-based firm, whose report has led to shares of Adani Group plunging on the bourses.

SEBI maintained that since the matter is in the early stages of examination, it may not be appropriate to list details about the ongoing proceedings at this stage.

SEBI also apprised the top court about Hindenburg and pointed out that Hindenburg is a short seller research company amongst other companies in the US that research companies that they believe have governance and/or financial issues.

It also informed about the strategy of Hindenburg and how it takes a short position in the bonds/shares of such companies at the prevailing prices (i.e., sell the bonds/shares without actually holding them) and then publishes their reports.

If the markets believe the reports, the prices of the bonds/shares start to fall.

Once the fall starts, other institutions who have "stop loss limits", also start selling their holdings of bonds/shares irrespective of whether they believe the report or not thus triggering a downward spiral in the bond/share prices, SEBI said.

"The short sellers then buy the shares/bonds at the lower prices, thus making a profit. The more the market believes their reports, and the more that 'stop loss limits' get triggered, the more the prices of the bonds/shares fall and the more money they make," SEBI said.

The SEBI Act, 1992, the SCRA and Depositories Act provide SEBI with powers to regulate the securities market, by framing appropriate regulations and updating them, as and when required, in response to the dynamic nature of the markets and the new types of behaviour that the market exhibits.

While framing such Regulations, SEBI seeks inputs from its Advisory Committees consisting of experts from the relevant fields.

Also, the consultation process involves seeking comments from the public at large by inviting comments on proposed regulations.

"The extant frameworks in place for investor protection and for ensuring stable operations and development of the market are robust and have been validated through the seamless operation and resilience of the markets at a systemic level, not just in recent weeks but even through the worst phases of the pandemic," SEBI said.

In respect of volatility in the share prices of specific companies, there are robust frameworks in place, which get automatically triggered and when triggered, are transparently disclosed in the public domain and serve as a signal to investors in respect of the risks related to high volatility in those shares, the SEBI said.

In the context of the PIL, the guardrails put in place by SEBI, were automatically triggered, when ASM became repeatedly applicable to shares in the Group, both when the prices were going up and recently when prices started falling, the SEBI said.

Dealing with such unusual events at a specific company level is a matter of surveillance and enforcement action if found necessary after detailed examination, which SEBI and stock exchanges would undertake in terms of the existing Regulatory framework, SEBI said.

Given the dynamic nature of the markets, increasing globalization of companies and markets and constantly and markets and constantly evolving landscape of players and activities in the markets, SEBI regularly updates its regulations based on learnings from global and domestic events.

In doing so, it has consistently followed a rich tradition of consultation through its various expert Advisory Committees as well as through public consultation, the SEBI said.

"In case there are any learnings from the case that warrant policy review, SEBI would, as a specialized regulator, undertake the same in the normal course, following its established process of expert as well as public consultation," the SEBI said.

SEBI said it remains committed to its mandate of investor protection, market development and market regulation. In an ever-evolving and dynamic market, it would continue to welcome inputs in respect of the same, SEBI said.