There would perhaps be no one who is remotely connected to the financial markets of India but is still clueless of the Adani-Hindenburg saga. The Nathan Anderson-founded investment firm Hindenburg Research released a report on Jan 24, 2023 that levels a series of allegations against the Indian conglomerate. Ever since the report became public, the Adani securities have been extremely volatile.
Besides Adani, the New York-based firm has released similar reports on Nikola, Clover Health, Kandi, and Lordstown Motors in the past.
After the opposition parties raised this issue during the Parliament’s Budget session, and urged to set up a JPC (Joint Parliamentary Committee), it was finally picked up by the markets regulator, Securities Exchange Board of India (SEBI) which has now stated that it would enquire into market activities to detect if there were violations of its regulations.
The provisions under which the market regulator is reviewing the alleged anomalies include Prohibition of Fraudulent and Unfair Trade Practices Regulations, 2003; SEBI (Prohibition of Insider Trading) Regulations, 2015; SEBI (Foreign Portfolio Investors) Regulations, 2019 and Offshore Derivative Instruments (ODI) norms, says a media report.
Let us understand what these provisions are:
Insider trading: Insider trading entails trading in a stock or other securities by employees who have access to some relevant information relating to the company which is not readily accessible to the public.
In other words, it is referred to as trading based on substantive information which is not available in the public domain, and can substantially impact an investor's decision to buy or sell the security.
Whether it is illegal or legal depends on when the insider makes the trade. It is usually illegal particularly when the information based on which trade was conducted was non-public.
One of the famous insider trading convicts is Rajat Kumar Gupta who was the first Indian managing director of McKinsey & Company between 1994 to 2003. He was sent to prison for two years after being convicted for insider trading in 2012.
Fraudulent and Unfair Trade Practices: This includes dealing in securities in a fraudulent manner. It prevents engaging in any act, practice, course of business which would operate as fraud.
Although fraud can differ in nature and form. This includes misrepresenting financial statements to lure investors into investing into company's securities.
FPI regulations: Foreign portfolio investment (FPI) consists of securities and other financial assets held by investors from abroad.
It does not give direct ownership of a company's assets to investors, and is liquid based on the volatility of the market. The FPI holdings can include stocks, mutual funds, exchange traded funds, and bonds, among others.
There are some regulations that govern the overseas investment in Indian companies. For instance, the regulations say that FPI will be less than 10 percent of the post issue paid-up share capital of the Indian investee company by a single FPI and 24% on a collective basis.
There are limited financial instruments wherein FPIs can invest and various other investment caps such as less than 50 percent of any issue of a corporate bond.
Offshore derivative instruments (ODI) norms: ODIs are investment vehicles that are issued by foreign portfolio investors to overseas investors for an exposure in Indian equities or equity derivatives without being registered with as an FPI.
These unregistered investors invest via a FPIs, which are already registered with SEBI. After making purchases, these FPIs or their affiliates issue financial instruments to them. The foreign investors can either invest in equities or derivatives such as Nifty futures.
As far as regulations are concerned, the markets regulator has framed a regulatory framework, that — among other things — stipulates the hedging positions foreign investors can take on these derivative instruments. The norms also pertain to the eligibility criteria of subscribers of these instruments.