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  • Ryan Joseph

A Subterfuge of S(h)orts: The Adani-Hindenburg Story

- Ryan Joseph†

Short-selling is a popular trading strategy used by investors to profit from the decline in a company's stock price. A constant in all short-selling strategies is the release of a report that outlines everything the short-seller believes is wrong with the company, urging the market to offload their shares. The author argues that short-seller reports should be treated as fraudulent under SEBI Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market (‘“PFUTP’”) Regulations when they make reckless representations about a company, whether true or not, to induce markets into selling the target stock, which causes artificial movements in the stock price of the target. The author does not call for a blanket ban on negative information on listed companies, only for short-seller reports that sensationalize negative information to induce investors into trading in the stock.


Concomitant to the advancements in capital markets, traders have developed innovative strategies to maximize profits. One such strategy is known as short selling. When short selling, an investor borrows the stocks of a company to sell them at a certain price and then waits for the stock price to tank and purchases the stocks at this lower price to return them to their previous lender. The net effect of this transaction is that the short-seller is able to pocket the difference between the two prices as their profit. This is a very simplistic explanation of short trading and in practice, traders use far more complex strategies. Nevertheless, a constant in all these strategies is to release a report detailing everything the short-holder believes to be wrong with the company. Through this report, the short-holder urges the market to offload their shares in the company which inevitably causes the stock price to crash. The recent short seller report by Hindenburg on the alleged irregularities in the operations of the Adani Group erased $51 billion market value of the Adani Group shares in just two days. This incident has once again brought to the fore the highly contentious issue of short-seller reports.

Scholars on one hand argue that short-seller reports promote the discovery of negative information which improves price discovery and efficiency of the markets. On the other, many argue that short-seller reports are malicious devices used by short-sellers to hammer down the stock price of their targets and profit on short positions.

This article intends to add to the ongoing discourse by highlighting the adverse effects of short-seller reports on the markets and arguing for them to be treated as fraudulent under the SEBI Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market (‘PFUTP Regulations’). Notwithstanding the foregoing, this article does not call for a blanket ban on any negative information on listed companies. It restricts its criticism to short-seller reports that sensationalise negative information against a company to induce investors into trading in the stock causing artificial movements in the stock price of the company to profit from it. To establish this argument, this article will explain what amounts to fraud under the PFUTP Regulations and proceed to show that very often short-seller reports make reckless representations about a company, whether true or not, to induce markets into selling the target stock which inevitably causes artificial movements in the stock price of the target.


Regulation 2(1)(c) of PFUTP Regulations defines fraud as “any act, expression, omission or concealment committed whether in a deceitful manner or not while dealing in securities in order to induce another person to deal in securities.” The criterion to constitute fraud is not to gauge whether the statement was made with a malafide intention but whether a statement induced others to trade in securities. The 2017 case of Securities and Exchange Board of India and Ors. v. Kanaiyalal Baldevbhai Patel and Ors. is a landmark judgment of the Supreme Court of India (‘SC’) in this regard. The SC admitted the difficulty of curbing frauds in capital markets because the general definition of fraud is incapable of capturing the innovative frauds that happen in capital markets. Therefore, the SC after relying on international jurisprudence, in paragraphs 25 to 29 held that the definition of “fraud” under the PFUTP Regulations must be an inclusive definition with a wide purport that is able to govern any action or omission, even without deceit, if it has the effect of inducing another person to deal in securities. The SC went on to emphasise that the focus is on the “act of inducement” and not whether the representations, actions, or omissions were motivated by malice. For instance, if a news reporter were to go on news and recommend a stock as a profitable investment and if this recommendation caused numerous investors to purchase the stock the said recommendation would be a fraudulent representation under the PFUTP Regulations. This is because the representation had the effect of inducing investors to trade in the stock hence, the representation would have been a fraud even if the news reporter honestly believed the stock to be a good investment irrespective of the accused’s intent. Numerous Securities Exchange Board of India (‘SEBI’) and Securities Appellate Tribunal (‘SAT’) orders have echoed this principle. In the matter of Netvision Web Technologies Limited, SEBI held that any representation of information in a distorted manner that has the potential to influence the investment decisions of others would be fraud under the PFUTP Regulations. Once again in the matter of V. Natarajan, the SAT held that any information that misleads the decision of investors constitutes fraud under the PFUTP Regulations. In essence, any information, even if true and rid of malice, if induces investors to trade in a stock is fraud under the PFUTP Regulations. The intent of such a low threshold for fraud is to create stable markets and allow the regulator to reign in on actors who use innovative means to cause heavy fluctuations in a stock and profit from it.


After a report by Muddy Waters alleged there were serious financial irregularities at Huishan Dairy and that its chairman fraudulently diverted funds from the company, the shares of the company fell by 85%. The catastrophic fall in their share price caused them to default on a few debts and even required the regional government of Liaoning to form an action plan to resolve the crisis at Huishan Dairy. Similarly, when Muddy Waters published a report on Sino Forest, a Canadian-listed Chinese company, its effect was so devastating on Sino Forest that it had to file for bankruptcy. The stocks of Olam International witnessed a 20% drop in its market value after Muddy Waters released a short-seller report against it. Similarly, Truecaller also witnessed a 20% intra-day drop in market value after Viceroy Research released a report against it. As on February 06, 2023, shares of the Adani group lost $113.6 billion in market value after the release of the Hindenburg report. The impact short-seller reports have on stock prices is commercially recognised and there have been instances of funds agreeing to share their profits with research agencies in return for the research agency releasing their report in a manner that maximises the returns on the fund’s short positions. These instances underpin the potency of short-seller reports in driving down stock prices rapidly as they have the ability to induce investors to sell their shares. This satisfies the “inducement” ingredient of the definition of “fraud” under PFUTP Regulations notwithstanding whether the claims in the short-seller reports are true or false.

A. Did the Stock Fall or was it Pushed?

One might argue that a fall in the value of shares is not an artificial fall but a logical sequitur to a report detailing irregularities in the operations of a listed company. Thus, there is nothing objectionable about the impact that short-seller reports have on the stock price of shares. The assumption that sustains this argument is that the allegations made in the reports are true and therefore, the drop in market value is a legitimate price correction. However, this assumption is not always true. For instance, in a report released by the Viceroy Research Group (‘Viceroy’) against Ebix Cash (‘Ebix’), inter alia, it accused Ebix of being investigated by the Internal Revenue Service (‘IRS’) and having paid a settlement of US$20.8m. In response, Ebix sued Viceroy for defamation before the Delhi High Court and was able to get an injunction against the publishing of the report on any social media websites. Furthermore, the High Court’s order even required Google and Twitter to take down the report all because the allegations in the report, were patently false.

Similarly back in 2018, Sabrepoint Capital engaged a researcher on a monthly fee of $9,500 to investigate Farmland Partner Inc (‘Farmland’) and released a scathing report against them. The report eventually caused a 39% drop in the share price of Farmland in response to which the company sued the researcher as well as Sabrepoint Capital. During the proceedings, the researcher admitted that his report was inaccurate and contained false allegations and agreed to take down the report and even compensate Farmlands for the damage caused to them. In other cases, where the veracity of allegations has not been confirmed, even if it is assumed that the allegations are true, the allegations are often made in a reckless manner where information is cherry-picked and is riddled with a bias to sensationalise negative news against the target company to induce investors to sell dump the stock. For example, the Hindenburg report against Adani was titled “Adani Group: How The World’s 3rd Richest Man Is Pulling The Largest Con In Corporate History.” Further, the report is replete with damming quotes; however, in numerous instances, the report fails to provide adequate sources to back its claims. For instance, the report argues that the Adani Group used Mauritian shell companies to manipulate the stock price of the Adani Group which helped the stocks reach sky-high valuations. Pressuring an upward movement of stocks requires market volatility and inordinate buy orders. However, the report does not make any reference to the trading patterns of the Mauritian entities nor have they provided any evidence to justify the modus operandi of the Mauritian entities to manipulate Adani Group stocks. The Hindenburg report merely vituperates the usage of Mauritian Entities by the Adani Group and commits a logical fallacy by assuming their existence implies something nefarious. Jurisprudence on Corporate Law would vehemently militate against this sin as the operational utility and the legal validity of such entities have been widely recognised.

As was established earlier in this article, when a person trading in securities makes a reckless representation that induces other investors to trade in securities, the representation amounts to fraud under the PFUTP Regulations. In N. Naryanan v. Adjudicating Officer, SEBI, the SC clarified that the legislative intent of the PFUTP regulations is to preserve “market integrity” and prevent “market abuse” by taking advantage of an artificial reaction of the markets. Further, the court held that such artificial reactions are said to occur when an individual disseminates information in a reckless manner that unduly influences the investment decisions of investors and causes a reaction in a market which would not have happened had the information not been disseminated in a reckless manner. One of the aims of a short-seller report is to induce fear in the markets about a company and motivate its investors to dump their shares and cause a crash in the stock price of the target company so that the short sellers can profit from their short positions. In fact, a probe into the volatility of the shares of the Adani Group revealed that it was the victim of an offshore bear cartel attack which used structured product derivatives to create unnatural volumes in the trading of the Adani scrip to inflate volatility and hammer down the Adani stock. An individual’s investment decisions are often contingent on market sentiments and the behaviour of other investors. Even if an investor believes that the allegations made in the report are baseless, the investor may fear that other investors upon reading the short-seller report would get nervous about their investments and offload their positions. A sudden sale would unsurprisingly push down the price of the stock. Therefore, despite not believing the allegations made in the report, the investor is forced to sell her stake to avoid a loss in her position. This is akin to the Byzantine general’s problem where the investor is unsure of the behaviour of other investors and rushes to exit before other investors start selling their shares which creates an artificial drop in share prices. In fact, after the Huishan Dairy incident, where the stock crashed 85% in one day, the CEO of the Hong Kong Stock Exchange (‘HKEX’) in a press statement said that the HKEX is not a “stock casino” and is a stable market where investments are safe. Similarly, after the sudden crash in Adani Shares, in a press release, SEBI had to reemphasise its objective of ensuring that Indian capital markets are stable and all efforts are being taken by them to reduce artificial volatility. In the United States, the Department of Justice even initiated an investigation into the trading actions of hedge funds and research firms to scrutinize their short selling. As part of the investigation, close to 30 firms and 36 individuals have been placed under the scanner. Lastly, in India, a PIL was filed in the SC seeking an investigation of the Hindenburg report against Adani “for exploiting innocent Investors via short selling under the garb of artificial crashing.” It is this ability of short-seller reports to send trepidations across markets notwithstanding their veracity that is objectionable and deserves scrutiny.


This article is not advocating for a blanket curb on reports that criticize the performance of listed companies. Criticism is an important tool that promotes information symmetry and improves price discovery in markets. SEBI has started monitoring the transactions of the Adani Group more closely and it ought to take action against the group in case irregularities are found. However, due to the sensitive nature of stock prices, short-seller reports cannot be allowed to throw mud on the wall just to see what sticks. After all, any sudden volatility in stock prices that too of liquid and household stocks such as the Adani group has huge implications for everyday investors and the stability of Indian capital markets. As Indian companies rise in global stature and reach new heights, they become more vulnerable to short-seller attacks. To give Indian companies the strength to sit on great walls, all the king's horses and all the king's men ought to put them together again. Globally, market participants have felt the heat of short-seller reports and have posed arguments to recogniZe short-seller reports as a form of market manipulation. Similarly, in India, the PFUTP Regulations provide the Indian capital markets regulator, SEBI with enough ammunition to classify short-seller reports as fraudulent devices owing to their possible manipulative effects on stock prices.

† Ryan Joseph is a 3rd year BBA., LL.B. (Hons.) student at Jindal Global Law School, Sonipat.

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