Three India-Based Firms Among 12 Gained From Short Selling In Adani Shares, ED Tells SEBI: Report

Hindenburg Research Report: Among the 12 firms identified, three are based in India, four are located in Mauritius, and one each in France, Hong Kong, Cayman Islands, Ireland, and London.

The Hindenburg Research report in January had triggered a market downfall

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A preliminary investigation conducted by the Enforcement Directorate (ED) has revealed that a dozen companies, including foreign portfolio investors and foreign institutional investors (FPIs/FIIs) based in tax havens, were the "top beneficiaries" of short selling in shares of Adani Group companies following the release of the Hindenburg Research report that triggered a market downfall, according to a report in The Indian Express.

Sources told The Indian Express that three of the 12 firms were based in India.

Short selling is an investment strategy when a trader borrows shares and sells them in the hope that the price will fall later. The traders, known as short sellers, then repurchase them at a lower price, thereby generating profit.

ED's findings, shared with market regulator Securities and Exchange Board of India (SEBI) in July, revealed that certain short sellers took positions just 2-3 days before the Hindenburg report was published on January 24 this year. Some entities engaged in shirt selling for the first time ever.

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SEBI, which endorses regulated short selling, permits domestic investors and FPIs/FIIs to trade in derivatives as a means to hedge market risks. 

Among the 12 firms identified, three are based in India (one being the Indian branch of a foreign bank), four are located in Mauritius, and one each in France, Hong Kong, Cayman Islands, Ireland, and London, The Indian Express reported. 

None of the FPIs/FIIs disclosed their ownership structures to Income Tax authorities, sources told the daily.

One such entity was incorporated in July 2020 but remained inactive until September 2021. However, it declared earnings of Rs 1,100 crore on a turnover of Rs 31,000 crore within just six months from September 2021 to March 2022.

Another financial services group, functioning as a bank in India, recorded a meager income of Rs 122 crore. However, as an FII, it reported an "astonishing income of Rs 9,700 crore" without any tax liability.

Among the dozen beneficiaries, the parent company of a Cayman Islands FII admitted to insider trading and settled a $1.8 billion fine in the United States. 

This FPI had taken a short position in Adani Group stocks on January 20 and then increased it on January 23. Another fund from Mauritius made its debut as short seller on January 10.

Two Indian companies also featured among the 'top short sellers' -- one registered in New Delhi and the other in Mumbai. SEBI had issued an order for misleading investors and market manipulation against the promoter of the firm registered in Delhi.

ED had previously presented its analysis regarding alleged insider trading to a six-member expert committee appointed by the Supreme Court in March to scrutinise regulatory lapses related to the Adani Group.

The ED's also indicated that the FPIs and FIIs might not be the "end beneficiaries" of gains derived from short selling. Instead, they could be acting as intermediaries for larger overseas players, the ED told SEBI.