Hindenburg receives show cause notice from Sebi over Adani issue

The short seller alleges 'surreptitious aid' to Adani Group by Sebi

US-based short seller Hindenburg Research has said that it received a "show cause" notice from the Securities and Exchange Board of India (Sebi) on June 27 "outlining suspected violations of Indian regulations" and alleged that the regulator came to Adani Group's aid after the January 2023 report was released.

"Our understanding from discussions with sources in the Indian market is that Sebi's surreptitious aid of Adani commenced almost immediately post-publication of our January 2023 report," it said in a blog post on Tuesday.

"Following our report, we were told that Sebi pressured brokers behind the scenes to close short positions in Adani under the threat of expensive, perpetual investigations, effectively creating buying pressure and setting a ‘floor’ for Adani’s stocks at a critical time."

 

The company said that after the Supreme Court asked the regulator to investigate the charges last year, it seemed to agree with "several key findings of our report".

"Later, Sebi claimed to be unable to investigate further," it said.

It added that last month, Adani Group's Chief Financial Officer Jugeshinder Singh said that some regulator notices aimed toward the group were "trivial".

"This confidence may be derived in part through Adani’s relationship with Sebi," it said, adding that Gautam Adani met Sebi Chairperson Madhabi Puri Buch twice in 2022.

Hindenburg Research said that it would file a right to information (RTI) application "seeking the names of Sebi employees that worked on both the Adani matter and the Hindenburg matter, along with basic details on meetings and calls between Sebi and Adani and its various representatives."

"We will await Sebi's response on whether it will provide basic transparency on its investigations," it said.

In the 46-page notice, which Hindenburg attached with the post, Sebi said that the report released in January last year "contained certain misrepresentations/inaccurate statements" meant to "mislead readers".

"Today we are sharing the entirety of this notice, frankly because we think it is nonsense, concocted to serve a pre-ordained purpose: an attempt to silence and intimidate those who expose corruption and fraud perpetrated by the most powerful individuals in India," Hindenburg said.

"In our view, Sebi has neglected its responsibility, seemingly doing more to protect those perpetrating fraud than to protect the investors being victimised by it," it added.

In the post, Hindenburg Research also named the Kotak Mahindra Bank and said that it oversaw an "offshore fund structure" used by the short-seller's investor partner for shorting the Adani Group stocks.

"While Sebi seemingly tied itself in knots to claim jurisdiction over us, its notice conspicuously failed to name the party that has an actual tie to India: Kotak Bank, one of India’s largest banks...which created and oversaw the offshore fund structure used by our investor partner to bet against Adani," it said.

"Instead it simply named the K-India Opportunities fund and masked the 'Kotak' name with the acronym 'KMIL'," it added.

In reply, a spokesperson of the Kotak Mahindra Bank on Tuesday said, "K- India Opportunities Fund Ltd. (KIOF) is a Sebi registered Foreign Portfolio Investor and is regulated by the Financial Services Commission of Mauritius. The Fund, was established in 2013 to enable foreign clients to invest in India. The Fund follows due KYC procedures while onboarding clients and all its investments are made in accordance with all applicable laws. We have cooperated with regulators in relation to our operations and continue to do so."

"Kotak Mahindra International Limited (KMIL) and KIOF unequivocally state that Hindenburg has never been a client of the firm nor has it ever been an investor in the Fund. The Fund was never aware that Hindenburg was a partner of any of its investors. KMIL has also received a confirmation and declaration from the Fund’s investor that its investments were made as a principal and not on behalf of any other person," it added.

The Hindenburg post also said that they had only one investor partner in their Adani "thesis".

"We have made $4.1 million in gross revenue through gains related to Adani shorts from that investor relationship," it said. "We made just $31,000 through our own short of Adani US bonds held into the report."

"Net of legal and research expenses (including time, salaries/compensation, and costs for a two-year global investigation) we may come out ahead of break even on our Adani short," the blog post read.

It added that there was "never a point where the Adani thesis was financially justifiable for us".

"But, to date, our research on Adani is by far the work we are most proud of," it said.

The short seller said that with the investigation, Indian investors have been given a "loud" message.

"You have no real protection from fraud. Corporate governance in India is a myth for businessmen that can buy influence," it said.

Sebi had been probing the Adani group, led by billionaire Gautam Adani, after Hindenburg Research alleged in January 2023 that there was improper use of tax havens and stock manipulation by the group.

The Supreme Court in January this year said that the Adani Group did not need to face more investigations beyond the current scrutiny of the market regulator.

(Disclaimer: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd)