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The Expert Committee, constituted by the Supreme Court of India on March 2, 2023 following Hindenburg Research allegations against the Adani Group, has taken into account the explanations provided by SEBI, supported by empirical data, and concluded that “prima facie, it would not be possible for the Committee to conclude that there has been a regulatory failure around the allegation of price manipulation.
The Committee has also called for probe into those who built short positions just ahead of the publication of the Hindenburg Report
The Committee has said in its Report: “It was submitted by SEBI that while the price rise of shares of AEL rose but no evident pattern of manipulative contribution to price rise could be attributed to any single entity or group of connected entities”.
The Committee has asked SEBI to prepare similar charts with data across all the Adani stocks and present the same for analysis. This can be work in progress as indeed is the intended probe into those who build shore charts with data across all the Adani stocks and present the same for analysis. This can be work in progress as indeed is the intended probe into those who build short positions just ahead of the publication of the Hindenburg Report and profited from the price crash upon its publication on January 24, 2023.
The Committee notes, during the period April 1, 2021 to December 31 2022, in which the price shot up from around Rs. 1,031 to Rs. 3,859, the largest net buyer was LIC buying around 4.8 crore shares; during this patch where the price rose, rendering it impossible to conclude that they had a hand in the price rise; The top 25 net LTP contributors, collectively contributed only around 13.89% to the LTP with no single entity contributing more than 5%; Though, no single entity had contributed significantly to LTP across different periods (patches), one entity appeared across the different patches amongst the top 25 net LTP contributors. Therefore, the trading activity of the said entity in the Adani stocks as compared with trading across all other stocks in these periods, was analysed. The trading concentration in Adani stocks ranged from 1.24% to 3.08% of its total trading, which is insignifican and not unusual.
As a result, it was submitted by SEBI that while the price rise of shares of AEL rose as discussed above, no evident pattern of manipulative contribution to price rise could be attributed to any single entity or group of connected entities.
On the Issue of Price Manipulation in Adani Scrips
The Committee called for a briefing from SEBI on the historical price movements in the Adani stocks and what SEBI’s approach had been as part of its surveillance of the market. The Committee also asked the invitees to comment on the subject.
SEBI pointed out that it has in place automated surveillance systems to monitor trading activity and price movements to point to detection of potential price or volume manipulation and other market abuse. From the data generated in the course of trading, alerts are generated by the algorithm that mines the data, after which the alerts lead to analysis based on set criteria including:-
a. Concentration of net buyers/ net sellers in the scrip;
b. Contribution of net buyers to the increase in Last Traded Price (“LTP”) during a price rise period and contribution of net sellers during price fall period,
c. Whether any group of entities traded among themselves, which might have led to increase/decrease in the price of the scrip;
d. Whether delivery was taken by the entities in a scrip and what proportion of deliveries were taken vis-a- vis their trading volume in that particular scrip;
e.Trading behavior of the top LTP contributors in particular scrip vis-a-vis their trading behavior across all other scrips;
f. Category of entities appearing in the top net buyers, net sellers and net LTP contributors e.g. Sovereign Wealth Funds, Mutual Funds, brokers, individuals etc.;
g. Whether the trading entities profited or incurred losses from the trades;
h. Concurrent corporate announcements o news lows about the company, triggering positive or negative sentiment in the scrip;
Factoring in the above factors, if the trading pattern appears to be suspicious the alerts are considered for further detailed examination. If the trading pattern does not arouse suspicion, then the alerts are closed.
SEBI submitted that based on the aforesaid factors, the price movement in the Adani stocks had been considered by the stock exchanges on four occasions and they had submitted a report to SEBI. Two of these were prior to the Hindenburg Report and two were after January 24, 2023.
In all the above four reports, the Stock Exchanges considered the factors mentioned above, and prima facie, found no evidence of any artificiality to the price rise and did not find material to attribute the rise to any single entity or group of connected entities.
From the first report mentioned above, SEBI submits that it observed that a set of common FPIs were having shareholding across the Adani Group companies, which led to a further detailed examination. It appears that the report received in September 2020 coincided with the complaints received by SEBI in June 2020 and July 2020 and eventually led to the formal investigation that commenced on October 23, 2020.
The investigation then was not into any alleged price manipulation, considering that there was no evidence of the FPIs having manipulated the stocks (they were net sellers as will be seen later) but investigations into potential violation of minimum public shareholding as a result of the FPIs was underway.
Likewise, there was also a reference to common FPIs found in the second report received in May 2021. SEBI submits that pending investigation triggered by the carlier report, SEBI undertook a review of the ASM framework in June 2021 and some added criteria were added.
SEBI also submitted that the Adani Group scrips have been were subjected to various surveillance measures ander the ASM framework. Trading in each of the seven stocks (below) has been scrutinised and kept under watch.
A study of the tables above would show that the Adani stocks had indeed been under watch by SEBI. The application of ASM measures would mean that investors were alerted and cautioned about the price rise. It is a matter of record that SEBI has stated it did not find any evidence of “wash trades” (where connected parties transact in a stock continually with one another without any intention to actually transfer ownership of the stock)
If none of the attendant factors that warrant a deeper and further probe was found, and indeed SEBI kept a watch in light of its concurrent probe into the suspicion about the minimum public shareholding, it stands to reason that one cannot return a finding of a regulatory failure.
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