Shorting Being Made Scapegoat For Adani Group’s Woes Due To Malpractices

By K Raveendran

In a desperate bid to defend Adani, an orchestrated attempt is being made to present shorting as something undesirable and even abominable. Adani himself has tried to pretend that the action by US investment firm Hindenburg in exposing the irregularities in his group’s accounting practices as an attack against India and the Modi government is putting all its might behind the tycoon, obviously because it is the most favoured corporate house in the country. Unfortunately, the Supreme Court, which is hearing pleas seeking investigations into Hindenburg’s expose, is also giving the impression that shorting is the villain.

Shorting is an accepted trading practice and it serves as a great corrective against corporate impropriety, which forces companies to be on their guard. The threat of shorting keeps companies to be beware of questionable practices as when it is detected it can damage a company’s prospects in the market for ever.

While it is true that the since the Hindenburg report was published, shares of Adani group companies have crashed, with the group forced to ditch its FPO issue, citing morality. It has indeed hurt millions  of investors. But that is no reason to justify fraud, as pointed out by Hindenburg in its reply to the alleged rebuttal by the Adani group. In fact, the investment firm has further exposed the rebuttal, citing the fact that Adani’s ‘413 page’ response only included about 30 pages focused on issues related to its report and that the rest comprised high-level financials, general information, and details on irrelevant corporate initiatives, ‘such as how it encourages female entrepreneurship and the production of safe vegetables’.

While expressing concern about protecting Indian investors, the Supreme Court has sought the views of the Centre and the Securities and Exchange Board of India (SEBI) on suggestions to improve the regulatory mechanism and proposed the constitution of an expert committee to give suggestions on strengthening the regulatory framework.

The court, however, noted that the Hindenburg report, which was beyond its territorial jurisdiction and that there are regulations which deal with the concerns. The court also opined that it was for the government to take a call on whether some modification is required for the regulatory framework. The court also indicated that beyond a certain stage it won’t enter into the policy domain.

It is obvious that there will be lot of arguments in favour of disallowing shorting as it has been found to hurt investors of the Adani group companies. But it would be a sad day if the government falls for the argument and come forward to ban the practice, which is accepted as normal and salutary in all mature markets. In fact, intolerance towards shorting has been mostly an Asian phenomenon as emerging market governments often show weariness towards practices that work against their companies even when they err in their practices.

It has been pointed out time and again that without this corrective, it is easier for bubbles to form, and then burst. Short-selling bans can also mean that investors have to pay higher prices for stocks. According to a report released by MSCI, short-selling is a key “ingredient in the efficiency of markets.” In the past, MSCI has warned countries that they may be excluded from certain indexes if they extend bans on short-selling.

Another benefit of short-selling is that it can enable investment strategies that align with environmental, social and governance principles and support a more sustainable economy. According to a report by Alternative Investment Management Association released in July, short-selling can help create “an economic impact by influencing the nature of capital flows through ‘active’ investing.”

Governments have been advised to recognize that regulated and transparent short-selling supports efficient markets, makes them more attractive to global investors, and enhances their ability to support local economies. (IPA Service)

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