top of page

Tread Carefully: The Adani- Hindenburg Fiasco on the Short-Selling Front

The author is Shirin Suri, a second year student at National Law Institute University, Bhopal.


In just two days, the market value of the Adani Group shares reduced by $51 billion as a result of the recent short-seller report by Hindenburg on the suspected anomalies in the operations of the Adani Group. This incident has once more highlighted the divisive topic of short-seller disclosures.

As capital markets have advanced, traders have created cutting-edge tactics to increase profits. Short selling is one of these tactics. By shorting stocks, an investor borrows the shares of a firm with the intention of selling them at a predetermined price. The investor thereafter waits for the stock price to fall and buys the shares at the lower price in order to sell them back to their original lender. Overall, this transaction allows the short-seller to keep their profit, which is the difference between the two prices. The short-holder pushes the market to sell its shares in the company through this report, which obviously results in the stock price falling.

By identifying the detrimental effects of short-seller reports on the markets and making the case that they should be treated as deceitful under the SEBI Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market (the "PFUTP Regulations"), this article focuses its condemnation on short-seller reports that sensationalise unfavourable information about a company in order to entice investors to trade in the shares, leading the stock price to move artificially in the firm's favour so that the short-seller can profit from it.

The Test for Fraud

The test for whether a statement constituted fraud was not whether it was made with malicious intentions, but rather whether it persuaded others to trade in securities. The Supreme Court of India's ('SC') 2017 ruling in the case of Securities and Exchange Board of India and Ors. v. Kanaiyalal Baldevbhai Patel and Ors. is a significant decision in this subject. The SC acknowledged that it is challenging to prevent fraud in the financial markets since the basic definition of fraud cannot account for the creative frauds that take place there. For this reason, the SC held in paragraphs 25 to 29 that the definition of "fraud" under the PFUTP Regulations must be an all-inclusive definition with a broad scope that can govern any action or omission, even without obfuscation, if it has the effect of inducing another person to deal in securities. The SC continued by emphasizing that the "act of enticement" is what is vital and not whether the statements, deeds, or omissions were done deliberately. In effect, under the PFUTP Rules, any information that encourages investors to trade in a stock, even if it is truthful and free of malicious intent, is fraud. Such a low threshold for fraud is intended to foster stable markets and provide the regulator the power to rein in individuals who utilise novel techniques to produce significant stock price swings and profit from them.

The Impact

Huishan Dairy's shares dropped by 85% after a Muddy Waters study claimed there were significant financial discrepancies at the company and that the chairman had fraudulently diverted assets. In addition to forcing them to collapse on a few loans due to the catastrophic decline in their share price, Huishan Dairy's dilemma necessitated the creation of an action plan by the Liaoning provincial government. Similar to this, Sino Forest, a Chinese firm that is listed on the Canadian stock exchange, had to declare bankruptcy after Muddy Waters published a report on it. Following the publication of a report critical of Truecaller by Viceroy Research, the market value of that company fell by 20% in one day. With the publication of the Hindenburg report, the Adani Group's stock had lost $113.6 billion in market value as of February 6, 2023. Commercial recognition of the influence short-seller reports have on stock prices has led to situations in which funds have agreed to split profits with research agencies in exchange for the research agency releasing their report in a way that maximises the returns on the fund's short holdings. These examples demonstrate the effectiveness of short-seller reports in swiftly lowering stock prices because they can persuade investors to sell their shares.

Analysing whether the Stock fell or pushed?

A report revealing inconsistencies in the operations of a listed company might be seen as logically following a decline in share value, not as an intentional decline. So, the bearing that short-seller reports have on the price of shares is not improper. This contention depends on the supposition that the claims stated in the reports are accurate, in which case the decline in market value is a valid price correction. This presumption is not always accurate, though. For instance, in a report against Ebix Cash ('Ebix'), Viceroy Research Group ('Viceroy') claimed, among other things, that Ebix was under investigation by the Internal Revenue Service ('IRS') and had settled for US$20.8 million. As a consequence, Ebix filed a defamation lawsuit against Viceroy before the Delhi High Court and was successful in obtaining an order to prevent the publication of the report on any social media platforms. Because the claims in the report were so obviously incorrect, the High Court's judgement also mandated that Google and Twitter remove the piece.

Adani Group: How The World’s 3rd Richest Man Is Pulling The Largest Con In Corporate History,” was the subtitle of the Hindenburg study critical of Adani. However, it does not cite enough sources to support its assertions. For instance, the report contends that the Adani Group manipulated its stock price by using Mauritius shell firms, causing the shares to trade at exorbitant prices. Market turbulence and excessive buy orders are needed to pressure stock prices upward. The study makes no mention of the Mauritius businesses' trading activities and offers no justification for their method of manipulating the stock prices of the Adani Group.. The operative utility and legality of such corporations have long been acknowledged; thus, corporate law jurisprudence would severely militate against this wrongdoing.

As was stated previously, under the PFUTP Rules, a person trading in securities commits fraud when they make a misleading representation that encourages other investors to trade in securities. The SC explained that the legislative objective of the PFUTP regulations is to safeguard "market integrity" and prohibit "market abuse" by taking advantage of an artificial reaction of the markets in N. Naryanan v. Adjudicating Officer, SEBI. The court also stated that such artificial reactions are said to exist when someone recklessly disseminates information that unfairly impacts investors' investment decisions and results in a market reaction that would not have occurred had the information not been released irresponsibly.

One of the primary goals is to sow market dread about a firm and bring about a collapse in the target company's stock price so that the short sellers can profit from their short - term securities. The Adani Group was actually the victim of an offshore bear cartel operation that used structured product derivatives to generate irregular volumes in the trading of the Adani scrip in order to boost volatility and drive the price of the Adani stock lower. Investment choices made by a person are frequently influenced by market conditions and investor behaviour.

Even if an investor deems the claims presented in the report are unfounded, the investor can worry that other investors will lose confidence in their assets after reading the short-seller report and sell their positions. Predictably, a sudden sale would cause the stock's price to decline. Hence, the investor is compelled to sell her share to prevent a loss in her position even though she does not believe the claims made in the report. Like the Byzantine general's dilemma, the investor is unsure of how other investors will act and rushes to sell their shares before they do, artificially driving down share prices.

After the abrupt decline in Adani Shares, SEBI was forced to reiterate in a press release that it aims to ensure that the Indian capital markets are stable and that every step is taken to eliminate artificial volatility. The Department of Justice even launched an investigation into the trading activities of research companies and hedge funds in the US to look into their short selling. Over 30 businesses and 36 people have been under scrutiny as part of the probe. Last but not least, a Petition against Adani was filed in India with the SC asking for an investigation into the Hindenburg report for "exploitation of innocent Investors via short selling under the pretence of artificial collapse." Despite their validity, the capacity of short-seller rumours to cause trembling across markets is unpleasant and warrants closer examination.


To conclude, this article does not support a complete ban on reportage of public listed corporations' poor performance and in order to act against the Adani Group if inconsistencies are discovered, SEBI has been closely following the transactions of the group. However, short-seller reports cannot be permitted to toss mud on the wall to see what sticks, due to the delicate nature of stock values. Since household equities like the Adani group are liquid and frequently traded, any abrupt volatility in stock prices has significant ramifications for regular investors as well as the security of the Indian capital markets.

Indian enterprises are more susceptible to short-seller attacks as they gain in global prominence and scale new heights. All the king's horses and all the king's warriors should be put back together to give Indian companies the strength to sit atop high walls. Market participants throughout the world have been affected by short-seller reports and have made several arguments to recognise them as a kind of market manipulation.

579 views0 comments


bottom of page