Why Is SEBI Upset About Being ‘Accused’ of Looking into the Run-Up in the Adani Stock?

The Securities and Exchange Board of India (SEBI), which is responsible for reporting to the Supreme Court (SC), was made to seem bad in the Adani-Hindenburg probe hearing.

‘Allegations’ that SEBI has been looking into the Adani group since 2016 were deemed ‘factually false’ by the agency on May 15.

The finance ministry sought to calm the social media uproar by tweeting that it “stood” by its answer in Parliament, although the premise was really a rather clear-cut response to a question in Parliament on July 19, 2021. Mahua Moitra, a member of Parliament (MP), responded, “Yes Ma’am,” to the minister of state (MoS). Regarding compliance with SEBI regulations, SEBI is looking into a few Adani Companies.

The finance ministry claimed that SEBI had looked into Adani stocks in relation to the issuing of global depository receipts (GDRs), but SEBI has also refuted this and claims that Adani is not the subject of any investigations. This is significant for Adani’s fundraising efforts, but it is a whole other issue.

Let’s talk about the major problem at hand as we observe how SEBI and the finance ministry manage to get themselves out of this humiliating predicament. Why does SEBI believe that being “accused” of conducting its duty to look into Adani equities is a “baseless allegation”? After all, it was the spectacular rise in the price of Adani shares that provided a chance for research-backed short-selling by the international company Hindenburg Research.

Let’s first examine the consequences of SEBI’s two affidavits submitted to the SC before moving on.

Defining the Problems

To begin with, SEBI seeks to frame and restrict the probe to the findings of the Hindenburg Research study, particularly the dramatic drop in pricing. But without prices that are much higher than business performance, fundamentals, and outlook, there would be no possibility for short selling. Why wasn’t SEBI looking into the stock prices of the Adani group given the amount of manipulation (discussed below)?

Second, SEBI has made an effort to argue for more time to conclude the probe by comparing its timeline with other regulators’, particularly the Securities Exchange Commission (SEC) of the US, timelines for comparable investigations. In its affidavit, it detailed for the Court the extensive information and minute details that it will need to collect and analyse in order to come to any conclusions, including yearly reports, contracts, deeds, loans, assets, transfers, agreements, board minutes, statements, and information from foreign authorities.

All of this is fantastic, but there are two issues. The ‘noticee’ or ‘accused’ is typically required to provide data and information within relatively short deadlines by investigating agencies and regulators in India. So, doing it is simple. Second, according to SEBI’s affidavit, the US SEC undertook 56 investigations in response to short-seller reports, concluding that just 13 cases resulted in action. The length of these investigations ranged from nine months to five years, with a two-year average.

Wonderful job; if the same time and effort had been put into the Adani stocks, it might have told the court if it had made even a preliminary determination on the matter. Additionally, when comparing itself to the SEC, would it adopt the US regulator’s operating procedures, which have been well-documented in countless books and films?

According to rumours, the SEC stays away from lengthy fishing trips like the one the SEBI has in mind. It concentrates on the most heinous offences, bargains with the little guys or drops charges in return for assistance and information, and seeks to build a case that can be won on bigger concerns.

The exact opposite is done by SEBI. The regulator continues to pursue unimportant employees who may have just carried out orders and casts a broad net, leading to flimsy cases that fall apart in court, as recently as the significant National Stock Exchange (NSE) co-location fraud (Colo). The Colo case, which dates from 2015, has not yet made it to the Supreme Court. In the same circumstance, SEC would have assured effective action against important actors and would not have been subject to sanctions (as SEBI was) for repeatedly requesting the NSE to conduct its own investigation. Perhaps instead of choosing only a few comparison points, we might look at how the research and results were as a whole.

The crucial stock price manipulation concerns and the 12 suspicious transactions identified by Hindenburg in the Adani case are just a small portion of the extensive inquiry that SEBI expects to launch.

We who have studied and written extensively on SEBI’s findings are aware of the trend. Although SEBI is sometimes unable to provide solid evidence in the face of major claims, there are always plenty of minor violations that may be used to strengthen an inquiry report and impose fines before the matter is resolved.

No initial indications in two months?

We expect that the Supreme Court would inquire as to whether or not it has even reached a prima facie conclusion of misconduct during the previous two months before granting SEBI’s request for an extension. Given what SEBI itself has to say about its own monitoring capabilities and deployed technology, this is not an unreasonable issue.

I drew attention to SEBI’s repeated statements in annual reports during the course of 2023 about the employment of technology for market monitoring in my column on March 11, 2023. To sum up:

1. ‘Deeply integrated technology’ in its surveillance activities, it stated in FY21–22, had enabled it “unearth complex modus operandi with adoption of better technology and data analytics.”

2. It was said in 2020–21 that “SEBI uses various innovative techniques, such as pattern recognition and data analytics” to analyse the daily production of approximately 550 crore trade communications.

3. While it might be a bit of an overstatement, it might not be wholly inappropriate to say that there are very few problems that technology cannot solve, according to a box titled “Data Detectives” in 2021–2022, which boasted the use of artificial intelligence (AI) and machine learning for “robust, agile, and scalable capabilities.”

4. A “Data Lake” with “characteristics such as visualisation, time series/machine learning analytical capabilities, ability to seek and search both structured and unstructured and semi-structured data, self-serviced business intelligence capabilities, in memory processing of data, etc.” was another assertion.

Due to this, SEBI was able to conclude 82 investigations into price and volume manipulation in 2020–2021 and 72 in 2021–2022; yet, no Adani stock made the list?

I’d want to end by asking two crucial questions.

First, a brief report has already been issued by the SC expert committee. Has it exonerated Adani or identified any red flags that warrant further investigation? If SEBI has in fact cleared Adani, it will be a waste of time. It is worth wondering why a highly-empowered SEBI, with such top-notch monitoring equipment, didn’t discover price escalating before the Hindenburg and has no results even after a SC order probe has finished for two months if the expert committee has established prima facie concerns that need investigation.

Second, the price information for four businesses is provided here so that readers may make their own judgements.

Adani Green increased by 5000% during the course of three years, rising from Rs55 to Rs3,000 before falling to about Rs875 at the moment.

In two years, Adani Transmission increased by 1500%, moving from Rs 250 to Rs 4,000, before falling to Rs 787 at the moment.

In 2.5 years, Adani Total Gas went from Rs 100 to Rs 3,900 and is currently trading at Rs 701.

Adani Enterprises increased by 2200% during the course of 2.5 years, from Rs175 to Rs4,000; it is currently trading at about Rs1,893.

In order to make a more accurate comparison, let’s look at just one case, namely Adani Total Gas.

Adani Total Gas’ peer group, which consisted of Indraprastha Gas, Mahanagar Gas, and Gujarat Gas, traded at multiples of 19.7, 15.9, and 23.3 on January 20, 2023, while Adani Total Gas had an astounding price/earnings multiple of 850. While the peer group is about at the same level at 23, 13, and 22, respectively, it is still at 141. After the publication of the Hindenburg report, there were no purchasers for a period, which caused the price to drop sharply.

Even a non-expert reader may decide whether or not something warranted investigation—Hindenburg Research or none at all!

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