Many referred to the Adani-Hindenburg Research affair as a ‘Lehman moment’. The allegations by a self-confessed ‘short seller’, the US-based Hindenburg Research, of the Adani Group’s “brazen stock manipulation and accounting fraud” continue to rattle the share prices of the conglomerate’s companies. It has kept the investors, regulators, the government and the judiciary, engaged all this while.
The share prices of the Adani Group companies had jumped dramatically over the last two years, but few paid any attention. Mutual funds, strangely, ignored to even partake in this wealth creation opportunity. Top fund managers couldn’t fathom why and how share prices of these companies were rising, touching astronomical valuations. But then, there was the country’s biggest domestic institutional investor, the state-owned insurer LIC, which acquired shares in five Adani companies continuously over the last nine quarters till December 2022.
The jury is still out on whether the Adani-Hindenburg Research affair is a Lehman moment. In the classical sense, it is not. The broad-based markets in India didn’t witness any pressure when Adani stocks tanked. The collapse of Adani is not a systemic risk, it doesn’t bring down the Indian financial sector; even for LIC, the exposure to Adani is less than 1 per cent of its portfolio. Will there be more unravelling in this case? Nobody is sure.
Well, this is not about the Adani Group or Hindenburg Research. This is about ‘short selling’ and how it triggered a massive debate in India after the real Lehman moment on September 15, 2008, caused a global financial crisis that spilled over to the real economy. ‘Short selling’ is an accepted practice worldwide – investors or traders borrow shares and sell in the belief that prices will fall. If prices do fall, they buy it back at a lower price, and pocket the profit.
In its report, Hindenburg Research was transparent and said it held short positions in Adani Group companies through US-traded bonds and non-Indian-traded derivatives. There are believers of its position in the US and other markets, and those who don’t. Back home in India, after prices of Adani shares plunged, the political opposition raised a hue and cry given Adani’s perceived proximity to the ruling political leadership. The Reserve Bank of India stepped in to reassure that the banking system was safe and resilient. The capital markets regulator, Securities and Exchange Board of India (Sebi), too, said it is probing the Adani stock volatility.
But 15 years ago, when the real Lehman moment happened, many prominent persons in India Inc wanted Sebi to ban short selling, arguing it led to huge market manipulation. The ban, they claimed, would prevent a free fall in the stock markets. The Lehman collapse had indeed left stock markets anxious in India. In less than two months – between September 8, 2008, and November 6, 2008 – the Nifty 50 index had dropped over 35 per cent, from 4,482 points to 2,892 points.
Clearly, there were more bears than bulls. But some argued that manipulators were rife, and were systematically pushing the markets down. In fact, NDTV Profit ran shows in October that year that Sebi was not acting tough enough on short selling by FIIs. Why should it not ban lending and borrowing of shares overseas using an instrument called participatory notes, the news channel asked.
It was under such circumstances that a ban on short selling was discussed at the highest levels – the Prime Minister’s Office – in the government. Many private sector big guns wanted the government to curb market freedoms. And strangely enough, bureaucrats and the political executive fought for reforms, and stood the ground.
What triggered the demand was a sharp fall in ICICI Bank shares – from about Rs 1,231 in January 2008, it had plunged to Rs 364 on October 10, 2008. There was a rumour of ICICI Bank ATMs running out of cash in a southern city. It didn’t help that the bank, seen as the most aggressive lender then, was borrowing at high rates of 20 per cent to meet its short-term needs. K V Kamath, the CEO of ICICI Bank, blamed it on manipulation and rumour-mongering. He spoke to then Sebi chief CB Bhave and officials in the Union Finance Ministry.
The pressure of some channels, including NDTV, Kamath and other private sector honchos reached the doors of then Union Finance Minister P Chidambaram who summoned his key officers. “Why shouldn’t it be banned?” he is learnt to have asked them.
Sebi’s Bhave had already made strong technical arguments against banning, but it was Joint Secretary K P Krishnan’s plain and simple English that won the argument. “You have very high fever. There are two options. One, take a paracetamol and sleep it through. Two, break the thermometer, and do not acknowledge you have a fever.”
Chidambaram took them to then Prime Minister Manmohan Singh’s residence the same weekend. Here, the finance ministry officials argued against the ban and pointed out that it was ironic that those lobbying from the private sector for this seemingly regressive move were the same folks who chastised the government then for its baby steps on financial sector liberalisation. Manmohan Singh was amused — he had learnt a fresh lesson on India’s political economy.
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