Supreme Court gives 3 months to SEBI to wrap up Adani probe.

Context: Refusing to hand over a probe into allegations of the Hindenburg Research report on Adani Group to a Special Investigation Team, the Supreme Court asked market regulator SEBI to continue with its investigations and complete the probe in three months.

Background:

• In late January, Hindenburg Research, which specialises in short selling, published a report critical of the group’s finances. The research firm, which has short positions in Adani companies through US-traded bonds and non-Indian-traded derivative instruments, said key listed companies in the group had “substantial debt” which has put the entire group on a “precarious financial footing”.
• Since the day  Hindenburg Research accused industrialist Gautam Adani-led conglomerate of “brazen stock manipulation and accounting fraud scheme over the course of decades”, shares of Adani Group companies have nosedived.
• Adani, who until recently was the richest Indian in the world, has now slipped to 22nd spot in the Forbes Real-time billionaire list for 2023.
• • Hindenburg Research is an investment research firm that focuses on analysing accounting irregularities, undisclosed indenburg Research transactions, illegal business or financial reporting practices among others.
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  • It alleged that Gautam Adani, founder and chairman of the Adani  group, has added over $100 billion to his net worth over the last three years, largely through stock manipulation and fraud.
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  • The research firm has raised concerns about its substantial debt.
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  • Hindenburg alleged that Adani used offshore shells for money laundering and siphoned from listed companies.
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  • Hindenburg revealed about short positions in Adani companies through bonds and non-Indian-traded derivative instruments.
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  • As per India’s tax and SEBI laws, short selling of domestic stocks outside the country’s jurisdiction is illegal unless they are listed on any exchange.
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  • While Adani bonds are listed on the US exchange, Hindenburg’s reference to the ‘non-Indian-traded derivatives’ raised the alarm for Indian regulators.

News:

The two aspects of the Hindenburg Research allegations against the Adani Group which market regulator Securities and Exchange Board of India is still probing are:

i) ownership of 12 foreign portfolio investors who hold stake in the companies of the group, and

ii) short sellers (selling without owning) in Adani shares during January 18-31 last year (around the time of the release of the Hindenburg report).

This investigation is being conducted by the regulator to find if there has been a violation of Section 19A of the Securities Contract (Regulation) Act, which stipulates minimum 25% public shareholding in listed companies.

Short selling

It is also known as "shorting," is a trading strategy where an investor sells a security that they do not own, with the expectation that its price will fall. The investor borrows the security through a broker and sells it on the open market, aiming to buy it back later at a lower price to make a profit. Short selling is considered an advanced strategy that carries high risk and requires careful analysis and timing

Follow-on Public Offer

An FPO, or Follow-on Public Offer, is a process where a company that is already publicly listed on the stock market issues additional shares to investors. This is done after the company has gone through an Initial Public Offering (IPO) and decides to make more of its shares available.

The purpose of an FPO is to diversify the company's equity base and raise additional funds for various reasons, such as financing expansion plans, paying off debt, or funding acquisitions.

The FPO process is similar to an IPO, requiring issuers to draft an offering document and allot shares to investors before listing them on the stock exchange.

There are two main types of FPOs: dilutive, where new shares are added, and non-dilutive, where existing private shares are sold publicly. Non-dilutive FPOs do not decrease the valuation and the ownership percentage of the company. Successful FPOs require careful planning, market analysis, and risk management

Free-float methodology in stock market capitalization: This method calculates the market capitalization of a stock market by taking the equity's price and multiplying it by the number of outstanding shares available for public trading, excluding locked-in shares held by insiders, promoters, governments, and other private parties. The free-float methodology is sometimes referred to as float-adjusted capitalization. It is considered a better way of determining market capitalization as it provides a more accurate representation of a company's worth according to public investors

Impacts of such events on the economy

• Impact on Capital Flow: MSCI's decision is expected to have a negative effect on the capital inflow into Adani stocks, particularly from passive investors who follow indices constructed by entities like MSCI.
• Decline in India’s Index Weight: According to Goldman Sachs, India's weight in MSCI's emerging markets index may decrease by 20-30 basis points due to the reduced weight of Adani stocks.
• Impact on Banks: Apart from the decline in Adani Group shares, banks, including the State Bank of India, which have provided loans to these companies, are also experiencing negative repercussions.
• Affecting Investor Confidence: The negative attention generated by Adani-related headlines has the potential to dampen investor interest in Indian stocks, impacting overall investor confidence.
• Consequences for Capital Raising: The ongoing developments can adversely affect the Adani Group's attempts to raise capital, whether through equity or debt offerings.
• Shortage of Shares: Indian-listed entities are facing a shortage of shares available for short sellers to borrow, leading to higher costs for such transactions.
• Impact on India’s Growth Narrative: If the downward trend in asset prices persists and further erodes investor confidence in the Adani empire, it could pose a setback to India's growth narrative, especially at a critical juncture.