Sebi asks investors to stay calm amid Hindenburg row: Controversy explained

Hindenburg has escalated its attack by targeting Sebi Chairperson Madhabi Puri Buch. The short-seller alleges conflicts of interest and undue favoritism towards the Adani Group.

Market regulator Sebi is taking steps to reassure investors and stabilise market sentiment following the latest report by Hindenburg Research.

 

Hindenburg's latest report alleged a conflict of interest involving Sebi Chairperson Madhabi Puri Buch and her husband due to their investments in entities linked to the Adani Group. The report also questioned the regulator's handling of the Adani Group investigations and its amendments to the SEBI (REIT) Regulations 2014.   

 

In response, Sebi asserted its independence and transparency, stating that all necessary disclosures have been made, and the Chairperson has recused herself from matters involving potential conflicts of interest. The market regulator has also reiterated its commitment to conducting thorough investigations, emphasizing the completion of 23 out of 24 probes related to the Adani Group.   

 

 

  Sebi also issued a statement on August 11, urging investors to remain calm and exercise due diligence in light of the report. "Investors should remain calm and exercise due diligence before reacting to such reports. Investors may also like to take note of the disclaimer in the report that states that readers should assume that Hindenburg Research may have short positions in the securities covered in the report."

 

Despite Sebi's efforts to reassure investors, the market remains cautious. The allegations have raised concerns about the regulatory environment and its impact on investor confidence.

 

Business Standard decodes the latest controversy in detail for you: 

 

Sebi-Hindenburg Controversy: A Clash of Titans

The controversy, which initially centered around the Adani Group, has now expanded to encompass allegations against India's market regulator itself.

 

The context: Hindenburg Research is a US-based investor-activist firm founded in 2017. Researchers at Hindenburg use financial forensic tools to find potential accounting irregularities and other corporate governance-related issues in mostly high-profile companies. The whistleblower has targeted companies like Nikola, Clover Health, Block Inc, Kandi, and Lordstown Motors in the past.'

 

Hindenburg initially accused the Adani Group of stock manipulation. They wanted a bigger investigation by the Central Bureau of Investigation (CBI) or a Special Investigation Team (SIT). The Supreme Court didn't grant their request, leaving Sebi to handle the investigation. 

 

The Adani Group's stock prices rebounded and recovered losses from the time of the Hindenburg report. This weakens Hindenburg's initial claims of manipulation. With their original goal seemingly on hold, Hindenburg might be changing tactics. Last month, Hindenburg wrote another blog post dragging Kotak Mahindra Bank into the controversy. They're now looking at Sebi, questioning whether the regulator is doing its job properly.

 

At the heart of it is the claim that Sebi Chairperson Madhabi Puri Buch and her husband had undisclosed investments in offshore funds linked to the Adani Group. Hindenburg alleges that these funds were instrumental in the Adani Group's alleged stock manipulation activities.   

 

The short-seller has also accused Sebi of bias in its handling of the Adani Group investigations, pointing to the regulator's alleged leniency towards the conglomerate. Moreover, Hindenburg has questioned Sebi's decision to amend REIT regulations, suggesting that these changes benefited certain entities, particularly Blackstone.   

 

Sebi has vehemently refuted these allegations, asserting the independence of the regulator and the transparency of the Chairperson's financial dealings. The market regulator has emphasized that it has conducted thorough investigations into the Adani Group, with the majority of the probes already completed.   

 

Point to note: The allegations come one-and-a-half months after Sebi issued a show-cause notice to Hindenburg for violating Indian market regulations and profiting by taking short positions.

 

On June 26, Sebi had slapped show cause notices (SCNs) on Hindenburg Research, its founder Nathan Anderson, and four others. In the notice, the regulator had alleged Hindenburg had made misleading disclosure as a scheme to profit from short-selling. In the SCN, the market regulator said it has also observed that the Hindenburg report contained certain misrepresentations and inaccurate statements. Sebi has also alleged that Hindenburg violated regulations by providing research on Adani group companies listed in India without registering under the Research Analysts (RA) Regulations. Sebi had given 21 days to submit responses. It is unclear if Hindenburg has responded to the notices. 

 

The Buch family has termed the accusations as "baseless allegations and insinuations" and claims they are completely untrue. They asserted that their finances are "an open book" and that all required disclosures have already been submitted to Sebi over the years. They expressed no hesitation in disclosing any additional financial documents, including those from before she became Sebi Chairperson. The Buchs suggest that Hindenburg's intent might be to damage their reputation rather than address the Adani Group investigation.

 

The Adani Group has also jumped into the fray, denying any connection to the alleged offshore fund and Madhabi Puri Buch's family. Here's what they said:  

No Business Ties: The Adani Group denies any "commercial relationship" with the Buch family. They dismissed the accusations as a "red herring," meaning a distraction from the real issue and reaffirmed their commitment to transparency and following all regulations.

 

Hindenburg's Credibility: They question Hindenburg's credibility, calling them a "discredited short-seller."