Short-selling in Adani Group shares resulted in gains for 12 firms

The Enforcement Directorate (ED) identified around twelve companies, including foreign portfolio investors (FPIs) and foreign institutional investors (FIIs), based in tax havens, as the primary beneficiaries of short-selling in Adani Group shares. The ED shared this information with the Securities and Exchange Board of India (Sebi) in July after conducting a preliminary investigation into the Hindenburg Research report and the subsequent market crash.

Short-selling just before Hindenburg’s report

Short sellers profit by borrowing and selling shares with the expectation of repurchasing them at a lower price in the future. The ED's findings revealed that some of these short sellers initiated their positions just two or three days before the publication of the Hindenburg Research report on the companies of Gautam Adani, while others were engaging in short-selling for the first time.

According to the agency's investigation, three of the identified companies are based in India, with one being the Indian branch of a foreign bank. Four entities are based in Mauritius, and one each in France, Hong Kong, the Cayman Islands, Ireland, and London.

None of the FPIs/FIIs has disclosed their ownership structures to the Income Tax authorities. For instance, one entity was incorporated in July 2020 but remained inactive until September 2021. Within just six months from September 2021 to March 2022, it reported an income of Rs 1,100 crore on a turnover of Rs 31,000 crore.

Another global financial services group, operating as a bank in India, reported minimal earnings within the country but a significant income of Rs 9,700 crore as an FII without paying any income tax.

One of the FPIs based in the Cayman Islands, listed among the 'top beneficiaries', had previously admitted to insider trading and paid a $1.8 billion fine in the US. This FPI initiated a short position in Adani Group shares on January 20 and increased it on 23 January 2023. A Mauritius-based fund, which engaged in short selling for the first time, did so on 10 January 2023.

Two Indian companies have been identified as 'top short sellers'. One of these companies is registered in New Delhi and has faced action from Sebi for misleading investors and manipulating the stock market. The other company is registered in Mumbai.

The Expert Committee, established by the Supreme Court to investigate the regulatory failure of the Adani Group, has received the findings from the ED. The committee has highlighted instances of "potentially violative selling by specific parties" and has recommended that Sebi investigate these actions.

Sebi recently provided an update on the Adani-Hindenburg probe to the Supreme Court. They have stated that 22 investigation reports have been finalised, including one that focuses on the trading patterns and short positions of certain entities in Adani Group companies during the release of the Hindenburg report.

Sebi is currently awaiting further information from external agencies and entities.

Based on the conclusion of the ED, it appears that FPIs and FIIs may be acting as intermediaries for larger overseas players, rather than being the ultimate beneficiaries of the gains from short-selling.