Sebi has a strong case against US-based Hindenburg Research, say lawyers

On June 26th, the Sebi issued show-cause notices to Hindenburg Research LLC, US-based hedge fund manager Mark E Kingdon, and four others

The Indian market regulator, the Securities and Exchange Board of India (Sebi), has a strong case against US-based short-seller Hindenburg Research, who the former has alleged to have traded based on unpublished price-sensitive information. Lawyers said Sebi may rope in American regulators to enforce its orders, as and when it issues them after completing its investigation.

“Based on disclosures so far, Sebi seems to have prima facie good case against Hindenburg Research and its partner for indulging in short selling based on unpublished price-sensitive information,” said R S Loona, managing partner of Alliance Law, a firm specialising in securities law. Sebi has jurisdiction over all persons, whether in India or overseas, dealing in or associated with the Indian securities market, he added.

 

Other lawyers echo similar views. H P Ranina, a Mumbai-based senior advocate, said Sebi has the jurisdiction to seek information from Hindenburg and its associates and then take action based on its investigation. “Hindenburg may move courts in India or may litigate in the US against Sebi,” he added. Explaining the case and why Sebi has a strong case, Sidharth S Kumar, senior associate, BTG Advaya, said, Sebi has claimed in its showcause notice that the Hindenburg report is a research report on the securities of Adani Enterprises. “Therefore, Hindenburg has violated the provisions of the research analyst regulations. Furthermore, it is alleged that Hindenburg earned profit-based fees from Kingdon Capital, whereas shareholders in India lost money due to market volatility. Sebi has sufficient powers under Section 11 of the Sebi Act, which can be exercised when the interests of investors in the Indian securities market are in jeopardy. Even the Supreme Court has approved the extraterritorial jurisdiction of Sebi.” says Kumar.

The Indian market watchdog can debar persons associated with the securities market but located outside India if the underlying shares are traded in India and/or their actions impact Indian investors. Sebi can proceed ex-parte if Hindenburg does not join the proceedings as the showcause notice has been duly served as per the inquiry rules. However, the real litmus test for Sebi would be enforcing its orders when Hindenburg has no presence in India, said Kumar. On June 26, Sebi issued showcause notices to Hindenburg Research LLC, US-based hedge fund manager Mark E Kingdon, and four others, accusing them of colluding to use non-public information to build short positions against Adani Group.

The other four include Hindenburg founder Nathan Anderson, Kingdon’s asset management firm Kingdon Capital, M Kingdon Offshore Master Fund, and K India Opportunities Fund, a Mauritius-based Sebi-registered foreign portfolio investor.

According to the showcause notice, as disclosed on Hindenburg Research website, Kingdon — through a Mauritius-based fund — established short positions ahead of the release of Hindenburg's report on Adani Group. Sebi said the report “misled” readers and caused “panic” in Adani Group stocks, thus deflating prices to the maximum extent possible and profit from the same. Sebi’s investigation found that these positions were squared off after the publication of the report, netting a “significant” profit of Rs 183 crore.

Soon after Hindenburg Research’s report was made public in January 2023, the share prices of Adani Group companies crashed, wiping out $150 billion of the group’s market valuation. Adani Group share prices recovered later after the group companies and promoters prepaid some loans to its lenders by selling part of the promoter stake to foreign investors, including GQG Partners.

Loona said, if Hindenburg or its partner do not join the investigation then Sebi may pass an ex-parte order against it, which may be enforced as a foreign award in the US courts as per the reciprocal treatment agreed to between the two countries — India and the US.

In a statement on its website, Hindenburg Research dismissed Sebi’s notice as “nonsense” and claimed that it barely broke even making a total of $4.1 million in gross revenue through gains related to Adani shorts.

In a separate statement to the stock exchanges on Tuesday, Kotak Mahindra Bank said, “We would like to clarify that the transactions in respect of which the above (short selling) allegations are being made were made by the fund on the advice, and for the benefit, of its investor Kingdon. Kotak Mahindra (International), or KMIL, was informed by Kingdon that the transactions were made on a principal basis, i.e., for themselves. Kingdon never disclosed that they had any relationship with Hindenburg nor that they were acting on the basis of any price sensitive information. In fact, they had expressly confirmed that any advice from Kingdon to invest would be basis purely public information.”

The statement by Kotak Mahindra Bank further said, neither the fund nor KMIL were aware that Kingdon entities, which include a US Securities and Exchange Commission (SEC)-registered investment advisor, in respect of whom KYC as per law was duly performed, had any association with Hindenburg. The fund and KMIL had no prior knowledge of the publication of the aforesaid Hindenburg report. “We deny any allegation of being aware of such report or acting in collusion in any manner with Kingdon or Hindenburg. We are legally advised that the fund acted in full compliance with its obligations under law as well as to its investors. The fund extended full cooperation to Sebi in its investigation and has shared all relevant facts,” the bank said in the statement.

Loona said Sebi can also take help from the US SEC if required, to enforce its order. “There have been several cases in the past when India used treaties to enforce its orders in foreign jurisdictions, including the US. The loss to Adani Group was huge and undue profit made by (Hindenburg Research) is a matter of concern for the regulator,” he said.

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