Why Is SEBI Taking Umbrage at Being ‘Accused’ of Investigating Adani Stock Run-up?
The Supreme Court (SC) hearing on Adani-Hindenburg investigation took a tantalising turn when it ended up embarrassing the finance ministry, to which Securities and Exchange Board of India (SEBI) reports.
Since the basis was, in fact, a fairly unambiguous answer to a question in Parliament on 19 July 2021, the finance ministry tried to douse the furore on social media by tweeting that it ‘stood’ by its answer in Parliament. The minister of state (MoS) told Mahua Moitra, member of Parliament (MP), “Yes Ma’am. SEBI is investigating some Adani Companies with regard to compliance with SEBI Regulations…”
While the finance ministry said that SEBI had investigated Adani stocks in connection with the issuance of global depository receipts (GDRs), SEBI has denied this too and asserts that there is no investigation against Adani. This is important for Adani’s fund-raising plans; but that is a different matter altogether.
As we watch how SEBI and the finance ministry extricate themselves from this embarrassing situation, let us discuss the big elephant in the room. Why does SEBI think it is a ‘baseless allegation’ to be ‘accused’ of doing its job of investigating Adani stocks? After all, it was the extraordinary run-up in Adani shares that created an opportunity for research backed short-selling by a global firm called Hindenburg Research.
Before we come to that, let us look at the implications of SEBI’s two affidavits in the SC.
Framing of Issues
For starters, SEBI wants to frame and limit the investigation around the Hindenburg Research report, specifically to the sharp fall in prices. But there would be no short-selling opportunity without prices far ahead of corporate performance, fundamentals and future prospects. Given the extent of rigging (mentioned below), why wasn’t SEBI investigating Adani group stock prices?
Secondly, SEBI has attempted to make a case for additional time to complete the investigation by making comparisons with time taken by other regulators for similar investigations, in particular the Securities Exchange Commission (SEC) of the US. Its affidavit outlined for the Court, the voluminous data and excruciating details such as annual reports, contracts, deeds, loans, assets, transfers, agreements, board minutes, statements and information from foreign regulators etc, that it will have to obtain and study to arrive at any findings.
This is all very impressive except for two problems. First, investigation agencies and regulators in India usually demand data and information in the precise format they want from the ‘noticee’ or ‘accused’ in very tight timeframes. So that is easily done. Secondly, SEBI’s affidavit says that the US SEC conducted 56 investigations following short-seller reports, to conclude that action was taken only in 13 cases and these investigation took anywhere from nine months to five years  giving an average of two years!
Excellent work, had the same time and effort been applied to Adani stocks, it could have informed the Court whether it had arrived at even a prima facie finding on the issue. Also, while comparing itself with the SEC, will it follow the US regulator’s modus operandi which has been documented in innumerable books and movies?
The SEC, we hear, avoids long fishing expeditions like the one planned by SEBI. It focuses on the most egregious violations, negotiates with the small fry or reduce charges in exchange for cooperation and information and works at a winnable case on larger issues.
SEBI does exactly the opposite. As recently as the major National Stock Exchange (NSE) co-location scam (Colo), the regulator cast the net wide and continues to go after irrelevant officials who may have merely followed orders and comes up with weak cases that don’t stand up in court. The Colo case, which goes back to 2015, is still to wind its way to the Supreme Court. In the same situation, SEC would not have faced strictures (as SEBI did) for repeatedly asking the NSE to investigate itself and would have ensured effective action against key players. Maybe, we should compare all aspects of investigation and outcome and not cherry-pick points of comparison?
In the Adani case, key issues of stock price manipulation and 12 suspicious transactions flagged by Hindenburg are just a small part of the expansive investigation that SEBI plans to open up.
Those of us who had studied and reported extensively on SEBI’s reports know the pattern. In case of serious allegations, SEBI is usually unable to come up with any concrete evidence; but there will always be plenty of tiny transgressions to pad up an investigation report to levy some penalties before winding up the case.
No prima facie findings in two months?
Before granting the extension that SEBI wants, we hope that the Supreme Court will ask one a basic question: Has it even arrived at prima facie findings of wrongdoing over the past two months? This is not an unreasonable question, given what SEBI itself has to say about its own surveillance powers and technology employed.
In my column on 11 March 2023, I pointed out to SEBI’s many boasts in successive annual reports about use of technology for market surveillance. To recap:
  • In FY21-22, it claimed ‘deeply integrated technology’ in its surveillance functions helped it “unearth complex modus operandi with adoption of better technology and data analytics.”
  • In 2020-21, it claimed, “SEBI uses various innovative techniques, such as pattern recognition and data analytics” to process over 550 crore trade messages that are generated every day.
  • In 2021-22, a box titled ‘Data Detectives’ boasted use of artificial intelligence (AI) and machine learning for ‘robust, agile and scalable capabilities’ and said, with faux modesty, “While it might be a bit of an overstatement, it might not be entirely inappropriate to say that there are very few problems that technology cannot solve.”
  • Another claim was a ‘Data Lake’, which reportedly “has characteristics such as visualization, time series/machine learning analytical capabilities, ability to seek and search both structured/ unstructured/ semi structured data, self-serviced business intelligence capabilities, in memory processing of data, etc.”
This allowed SEBI to complete 72 investigations into price and volume manipulation in 2021-22 and 82 in 2020-2021, but no Adani stock found its way into the list?
Let me close with two important questions.
First, the SC expert committee has already submitted a quick report. Has it given Adani a clean chit or has found prima facie issues that require investigation? If it has, indeed, given Adani a clean chit, SEBI will only be wasting time. If the expert committee has found prima facie issues worth investigation, it is worth asking why a highly-empowered SEBI, with such world-class surveillance technology, didn’t catch price ramping before Hindenburg and has no findings even after an SC order investigation has completed two months!
Secondly, here is the price data for four companies to allow readers to draw their own conclusions.
1. Adani Green rose 5000% in three years going from Rs55 to Rs3,000 before dropping to around Rs875 now.
2. Adani Transmission rose 1500% in two years going from Rs250 to Rs4,000 before dropping to Rs787 now.
3. Adani Total Gas rose from 3800% in 2.5 years up from Rs100 to Rs3,900 and is now trading at Rs701.
4. Adani Enterprises rose 2200% in 2.5 years from Rs175 to Rs4,000 – it is now trading at around Rs1,893.
A better comparison would be with the peer group, so let us look at just one example, that of Adani Total Gas.
On 20 January 2023, when Adani Total Gas had a jaw-dropping price/earnings multiple of 850, its peer group, comprising Indraprastha Gas, Mahanagar Gas and Gujarat Gas, traded at multiples of 19.7, 15.9 and 23.3, respectively. It is still at 141, while the peer group is around the same at 23, 13 and 22, respectively. The price crashed precipitously after the Hindenburg report because there were no buyers for a while.
Even a lay reader can draw her own conclusions about whether this needed an investigation – Hindenburg Research or no research!
10 months ago
excellent report.
11 months ago
Sebi is sleeping as usual. The government does not open it's mouth. SC allows dragging. Small and retail investors are victims.
Kamal Garg
11 months ago
All regulators in India are very poor in conviction of alleged wrongdoers in court of law. I think most regulators, even in case of serious allegations and wrong doings - as observed in this blogpost - try to brush aside concrete evidence and concentrate on small and tiny transgressions, which have no concrete meaning, to show that they have done investigation and have dug up so many wrong doings and have collected penalties from so many persons, rather than, finding strong and infallible concrete evidence. I have been told by many PSU banks' managers that they insist on collecting large number of related and unrelated documents from a loanee only to prove that they have collected so many number of documents and still the case has turned NPA or has fled the country, it is not their fault.
11 months ago
A very comprehensive analysis of the issues involved regarding Adani. SEBI obviously has government's full support in dragging the issue as far as it can. 'A stitch in time saves nine' and speed is the essence of execution. In India, most financial frauds of huge dimensions take decades for investigation only to loose the opportunity to rectify/correct/collect the dues from the notorious and powerful robsters!
11 months ago
It's unfortunate that while the regulator, with all the sophisticated technology at its disposal, is seemingly giving a long rope to the alleged culprits, the apex court too, in turn, is giving a long rope to the regulator itself! It can only happen in a Banana Republic.
11 months ago
It is difficult to wake someone who pretends to sleep. Sebi does not want to say anything before 2024 election
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