Explained: Why Adani Group stocks fell on Monday and Tuesday

Later, the  NSDL and Adani Group clarified that the accounts had not been frozen.

National Securities Depositories Limited, one of the largest depositories in the world, allows investors to hold securities in dematerialised form.

According to some accounts, the NSDL website mentioned that the accounts of Mauritius-based Cresta Fund, Albula Investment Fund, and APMS had been frozen on account of non-compliance with SEBI norms. These funds owned  over Rs 43,500 crore of shares in Adani Group companies.

According to SEBI norms, all FPIs have to follow the beneficial ownership criterion under the Prevention of Money Laundering (PMLA) act. Per the rules, FPIs are required to submit additional details, such as personal details of key employees and disclosure of common ownership.

In an email to the port-to-energy conglomerate, NSDL clarified it did not freeze any accounts on Monday.

"The status of Demat accounts mentioned in your trail email are held in 'active' status in NSDL system," Rakesh Mehta, vice-president of NSDL told Adani Group in an email exchange, accessed by CNBC-TV18.

The NSDL website, however, continued to show the three FPI accounts frozen. But NSDL officials told Moneycontrol that the action relates to other cases.

The freeze on accounts of the funds that hold certain other securities is not new, officials told Reuters. However, the depository has not taken any action now.

Earlier on Monday, the group had called media reports "blatantly erroneous."

"We regret to mention that these reports are blatantly erroneous and are done to deliberately mislead the investing community. This is causing irreparable loss of economic value to the investors at large and reputation of the group," it said in a regulatory filing.

In an interview with CNBC-TV18, Jugeshinder Singh, Group CFO of Adani Group said "there has been a malicious attempt to push a patently false story." 

Foreign Portfolio Investors' holdings in companies are closely watched by domestic investors. It is generally perceived that companies with high percentage of FPI holdings are fundamentally sound and have good governance standards. That is because FPIs usually invest in a company only after they have researched and analysed the prospects.

If the FPIs are restricted from buying and selling certain securities, it affects sentiment for those stocks, more so if those FPIs are key investors.

The shares of Adani Group only had sellers in the opening session on Monday. The shares plunged as much as 25 percent during the session -- the steepest fall in a decade.

Group stocks continued extending losses on Tuesday, even though NSDL had clarified the matter. Early Tuesday, the group shares hit lower circuit limits, except Adani Enterprises and Adani Ports.

At the time of writing, shares of Adani Enterprises were 3 percent up, and Adani Ports was 0.22 percent down. The shares of Adani Total Gas, Adani Transmission, and Adani Power were each down 5 percent.

During the last year, the shares of Adani Enterprises, Adani Transmission, and Adani Green have soared over 950 percent, 650 percent, and 250 percent. Adani Ports and Adani Power have surged nearly 150 and 300 percent, respectively.

Because of the run-up in share prices, it would have attracted the interest of many short term players who purely ride the momentum. Many of these players would have suffered losses on Monday when the share prices fell sharply, and they were unable to sell their holdings.

When prices recovered, many players would have decided to book profits or sell out altogether, fearing a repeat of a sudden. The resulting weakness in the stock would have worried other players, who too may have decided to pare their positions. This resulted in a vicious cycle where falling prices prompted more players to reduce their positions.