Adani shortseller saga probe to test Sebi, SC check on the rich & powerful

With PM largely silent on the controversy despite attacks from opposition, these investigations are most significant way India can signal to investors that it is willing to scrutinize its largest firm

By Advait Palepu and Saikat Das

India’s top court and markets regulator are facing their biggest opportunity to show the country’s determination to police its most powerful companies as they investigate the bombshell allegations lobbed at the Adani Group by Hindenburg Research.

A six-member expert panel — set up at the Supreme Court’s direction on March 2 to look into any regulatory failures and suggest reforms for investor protection — has filed its report to judges in a sealed cover, according to a person familiar with the development who did not want to be identified as the information is private. The court may open it on Friday, this person said, when the matter comes up for hearing again.  

The court had also asked the Securities and Exchange Board of India, or SEBI, in early March to separately investigate Hindenburg’s accusations of corporate fraud, which the group has denied. The regulator is requesting a six-month extension beyond the two-month deadline as it seeks more financial details locally and overseas.

With India’s Prime Minister Narendra Modi largely silent on the controversy despite attacks from opposition parties, these investigations are the most significant way India can signal to the investors that it is willing to scrutinize its largest firms and align them closer to global standards of corporate governance. The Supreme Court is weighing in after a slew of public interest petitions were filed.

The expert panel, staffed with veteran Indian bankers, retired judges and technology tycoon Nandan Nilekani, was told by SEBI that there’s little threat to investors from Adani companies, said a person familiar with the matter. Most of the firms in the ports-to-power conglomerate have posted robust earnings, and there are no signs of further market volatility, the person said. 

Nevertheless, anticipation is high that the Supreme Court or SEBI may ultimately recommend changes to corporate governance frameworks stemming from the unprecedented market rout and global scrutiny suffered by the Adani Group — or at least tighten rules around practices that US shortseller Hindenburg seized on. SEBI is also looking into possible violations of insider trading regulations and shortselling norms. The Adani Group has called Hindenburg’s conduct “a calculated securities fraud” and an attack on Indian institutions.

“This is a chance for them to come out and say: You know what? It’s not going to happen again,’” said Sharmila Gopinath, specialist advisor India at the Asian Corporate Governance Association. “You need deep reform, you need regulators who are strong enough to enforce the rules.”

Adani Group and SEBI did not respond to emails seeking comments on the court-led scrutiny and the panel’s report. 

Byzantine Web

The Jan. 24 Hindenburg report detailed a byzantine web of Adani-family controlled offshore shell entities in tax havens, from the Caribbean, Mauritius and the United Arab Emirates, that it alleged were used to facilitate corruption, money laundering, stock price manipulation and taxpayer theft. 

Even though the Adani Group has repeatedly refuted these claims, the ensuing market selldown has wiped $100 billion off the market value of its listed entities. 

One area highlighted by Hindenburg that’s received attention is how parties like Gautam Adani’s little-known elder brother, Vinod Adani, is a director of several overseas firms which are either investors in or transact with Adani’s empire. The US shortseller characterized this as “a vast labyrinth of offshore shell entities” that moved billions of dollars into Adani firms without disclosure “of the related party nature of the deals.” 

The Adani Group has always maintained that it is fully compliant with disclosures required under Indian laws, while Mauritius Minister of Financial Services and Good Governance, Mahen Kumar Seeruttun, told Bloomberg in February that there has been no breach of regulations in his jurisdiction. 

“Money often gets routed through several tax havens with loose and differing disclosure requirements, which create another set of challenges for the investigator,” said Navajyoti Samanta, associate professor in law at the University of Leicester. He suggested that a streamlined data-sharing standard operating procedure should be established between Indian institutions and foreign counterparts. 

The Supreme Court-initiated investigation into allegations against the Adani Group — and the broader regulatory framework surrounding it — is unprecedented for Indian businesses. 

While the top court has set up expert panels in the past, those were mostly for political hot-potato issues such as India’s three farm laws and the use of Pegasus spyware on journalists, activists and politicians.

Probes into corporate blow-ups, such as the 2009 audit scam in Satyam Computers, a banking scam by diamantaire Nirav Modi in 2018 and the collapse of the Infrastructure Leasing and Financial Services Group, were led by sector regulators. Culpability was either confessed by the company managements or there were defaults that compelled regulators to step in.

With the Adani Group, no wrongdoing has been proven so far and neither has it defaulted on any repayments. The judicial and regulatory stance taken in the Adani case could therefore become a precedent as Indian conglomerates increasingly tap global pools of capital.

Runaway Valuations

Another issue SEBI is investigating is unusual market activity in Adani stocks, as the short seller-triggered rout punctured astronomical valuations of the tycoon’s firms that had come under increasing concern last year. 

Adani stocks’ runaway valuations were “constantly under question but not its assets,” said Amit Tandon, managing director of proxy advisory, Institutional Investor Advisory Services India Ltd. 

Clarity is needed on who owns overseas funds with stakes in Adani firms as well the beneficiaries of the money flowing in and around the conglomerate. The overseas funds came under scrutiny as Adani companies’ stock prices rose way past the market valuations of local and global peers, buoying Gautam Adani to the position of second-richest man in the world last year. 

“The lesson is that we perhaps need better disclosures on beneficial ownership and regulatory mechanisms to trace money flows,” Tandon said.