SEBI may probe short selling to hammer down Indian markets

Markets regulator, SEBI is likely to probe short selling in the Indian stock markets in the last few days.

Sources said Indian markets have been under onslaught in the last few trading sessions and a probe will ascertain the role of short sellers in bringing the market down.

According to a SEBI discussion paper, short selling -- the sale of a security that the seller does not own -- is one of the long-standing market practices, which has often been the subject of considerable debate and divergent views in most of the securities markets across the world.

The votaries of short selling consider it as a desirable and an essential feature of a securities market. The critics of short selling on the other hand are convinced that short selling, directly or indirectly, poses potential risks and can easily destabilise the market.

In an efficient futures market, the relationship between spot price and futures price of the underlying asset is governed by cash-and-carry arbitrage and reverse cash-and-carry arbitrage. The latter requires that traders should be able to sell the underlying security short unless of course there are enough traders who own the security and are able to sell it cash to take advantage of a too low futures price.

It is noteworthy though, that despite the conflicting schools of thought, securities market regulators in most countries and in particular, in all developed securities markets, recognise short selling as a legitimate investment activity. Such jurisdictions also have an active market for equity derivatives which includes stock futures. Some of the jurisdictions even recognise the usefulness of naked short sales in certain circumstances and instead of prohibiting short sales; the regulators have permitted it to take place within a regulated framework.

The International Organisation of Securities Commissions (IOSCO) has also reviewed short selling and securities lending practices across markets and has recommended transparency of short selling, rather than prohibit it.

As per media reports, in 2022, the US prosecutors considered racketeering charges in a sprawling probe of hedge funds and research firms that bet against stocks.

The US Justice Department issued subpoenas to dozens of firms as part of the sweeping probe focused on potentially manipulative trading around negative reports on listed companies published by some of their investors, media reports said.

Adani Group has said in a statement that accounting (or fraud type assertions) "investigation" by Hindenburg are devoid of facts. Of Adani portfolio's nine public listed entity's eight are audited by one of the Big 6.

On leverage or over leverage issue -- 100 of our various companies are rated (these account for nearly 100 per cent of our EBITDA), Adani Enterprises said in a stock exchange filing.

On revenue or balance sheet being artificially inflated or managed -- out nine listed companies in Adani portfolio six are subject to specific sector regulatory review for revenue, costs and capex, Adani Group said.

In relation to governance, four of our large companies are in the top 7 per cent of the peer group in Emerging markets or the sector or the world. On the LAS position do note that overall promoter leverage is less than 4 per cent of promoter holding, the group said.