Artius Global experts analyze Adani Group’s Shareholding Ownership Structure: Unveiling Questions and Intricacies
Reflecting this, the Adani Enterprises lost more than 60% of their aggregated market cap, or more than US$30 billion, in the period between Hindenburg’s report on 24 January and the close of Thursday trade.
The Hindenburg Research Group postulates that the owner otherwise known as ‘Promoter’ in Indian capital market terms had pledged its ownership in the Adani Group for debt. They claim the ports-to-power conglomerate’s firms took substantial debt, including pledging shares of their inflated stock for loans, putting the entire group on precarious financial footing. This is a likely scenario as it is typical for owners ‘promoters’ to pledge shares in return for loans.
It is worth noting the Hindenburg Research Group devoted 2 years of research which allegedly claims that the Adani Group had manipulated their stock through a web of companies utilizing tax havens to inflate revenue and stock prices, as well as conceal the actual extent of Adani’s family stock ownership in the group companies, and accounting frauds leading to excessive valuations.
ARTIUS GLOBAL’S TAKE
Two points come to mind, regulators are there to ensure law and order is maintained in order to provide a stable and transparent capital market environment, the possibility that Adani had concealed the extent of their stock ownership is notable. On such principles Artius Global would expect the likes of Securities and Exchange Board of India (SEBI) and other regulators to up the ante and demand more transparency in regards to ‘Promotor’ shareholder positions and the need to declare the ‘change in ownership’ for promoter shareholdings that have been pledged to a related/non-related entity.
We draw parallels to the Archegos Capital saga in the US whereby Archegos had accumulated a sizeable position of swaps. As per the US regulator, SEC did not require declaration of ownership of swaps i.e. indirect ownership meant that Archegos Capital remained an anonymous investor in respect to their shareholding. Their counterparties, the respective prime brokers who held the swap were in no obligation to disclose themselves or require Archegos to declare their shareholding positions, this is clearly an example of regulations not capturing actual investment positions and the possible influence an investor could have on any listed equity. We note SEC is now proposing to include swaps as part of its shareholding disclosure requirement.
Secondly, India has transparent short selling rules, though naked short selling is not permitted, and institutional covered short sale transactions need to be recorded with the exchange when placed and made public. In essence, no naked shorts mean that it is hard for institutional short sellers to amass positions quietly which is why it’s hard to short Indian issuers who trade only on Indian markets i.e. Adani Group listed equities.
So how does Hindenburg amass such a large position as it did not disclose how they were able to create a large short position other than “through U.S.-traded bonds and non-Indian-traded derivatives, along with other non-Indian-traded reference securities”. This does expose a gap in India’s short selling regulation and it is notable that although SEBI led the way in shareholding disclosure fines in 2022, they did not issue any sanction for short selling. As was the case in 2021 as well.
Up until now, it appears that the short selling regulations in India have been sufficient, though clearly it does not capture the complex investment structures that can be set up to get around the short selling regulations. We are of the view that SEBI will revisit the ‘P-Note’ or Participatory Note which was introduced in 2000 to expand access to India’s markets to foreign investment. [A ‘P-Note’ is an overseas derivative instrument that has Indian shares as its underlying asset.] It is suspected that Hindenburg used ‘P-Notes’ to build their short position. P-Notes are not reported at the time of transaction but instead are reported monthly by the registered foreign institutional investor to SEBI thereby, providing that window where they could time the release of the report and the amassed short position.
To protect investors, SEBI must act and will undoubtedly look at loop holes in both short selling regulations and pledged securities where there has been a change in ownership. SEBI is likely to look at including P-Notes or implement some other mechanism to regulate overseas investments in regards to shareholding disclosure and create greater transparency. There are still plenty of questions out there in respect to SEBI’s day to day oversight of its members especially how a conglomerate of Adani’s size can be confidently audited by a small Indian firm comprising of 14 people.
The above highlights the complexity of the shareholding disclosure space. For those wanting more information, feel free to reach out to us at enquiries@artiusglobal.com.
Artius Global Shareholding Disclosure Solution ‘AGSD’ is there to mitigate regulatory disclosure requirements for capital market participants and financial services companies who are required to meet regulator demands globally and mitigate regulatory risk that potentially results in hefty penalties, sanctions and even criminal/civil liabilities.
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