Sebi issues showcause notices to Hindenburg Research, five others

Alleges Hindenburg disclosures misleading

The Securities and Exchange Board of India (Sebi) has issued showcause notices (SCNs) to American short-seller Hindenburg Research, US-based hedge fund manager Mark Kingdon, and four others, accusing them of colluding to use non-public information to build short positions against the Adani group.

According to the SCN, as disclosed on the Hindenburg Research's website, Kingdon — through a Mauritius-based fund — established short positions ahead of the release of Hindenburg’s scathing report on the Gautam Adani-led conglomerate which resulted in a $150 billion market value wipeout. It said the report “misled” readers and caused “panic” in Adani group stocks, “defl­a­ting prices to the maximum extent possible and profit from the same.” 

 

Sebi’s probe found that these positions were squared off after the publication of the report, netting a “significant” profit of ~183 crore. New York-based Hindenburg Research has dismissed Sebi’s notice as  “nonsense” and claimed that it barely broke even — a total of $4.1 million in gross revenue through gains related to Adani shorts. 

After receiving the 46-page SCN, Hindenburg Research, in a blog post on Tuesday, alleged: “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.”  

According to Sebi’s findings, Kingdon allegedly entered into an agreement with Hindenburg in May 2021 to share 30 per cent of the profits from trading in researched securities. The SCN claims the disclaimer in Hindenburg’s report, stating it held positions only through non-Indian traded securities, was misleading, as it concealed its direct stake in profits from Kingdon’s positions.

“The statement portrayed non-association of Hindenburg with the Indian markets, which was not true,” said Sebi in the SCN issued on June 26.

But the American short-seller dismissed Sebi’s notice as “an attempt to silence and intimidate those who expose corruption and fraud.” It also alleged: “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 six noticees include Hindenburg founder Nathan Anderson, Kingdon’s asset management firm Kingdon Capital, Kingdon Offshore Master Fund, and K India Opportunities Fund (KIOF), a Mauritius-based Sebi-registered foreign portfolio investor (FPI) used to create short positions in Adani Enterprises (AEL).

In a statement, a spokesperson for Kotak Mahindra International Limited (KMIL) said that KIOF is regulated by the Financial Services Commission of Mauritius. The fund was established in 2013 to enable foreign clients to invest in India and 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 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 confirmation and declaration from the fund’s investors that its investments are made as a principal and not on behalf of any other person,” said the spokesperson for KMIL.

According to the SCN, Hindenburg Research shared a draft of its Adani report exclusively with Kingdon on November 30, 2022. Shortly thereafter, Kingdon Offshore Master Fund began subscribing to 100 per cent of participating redeemable (PR) shares of KIOF Class F fund. On January 10, 2023, KIOF’s derivatives trading account was activated, building short positions for 850,000 shares of AEL.

After the report’s publication, AEL shares plunged -- in all, they fell as much as 59 per cent between January 24 and February 22, 2023.

Sebi has also accused Hindenburg of violating regulations by providing research on Adani group companies listed in India without registering under the Research Analysts (RA) Regulations. “The report comprised written or electronic communication including research analysis or opinion concerning securities listed in India and was a ‘research report’ governed by the RA regulations. However, Hindenburg did not enter into an agreement with a research analyst or research entity (RE) registered under the RA Regulations as required by Regulation 4 of the RA Regulation,” stated the markets regulator in the SCN.

The domestic securities regulator has given the noticees 21 days to respond, after which it may pass strictures against them. However, enforcement of the order remains uncertain, given Hindenburg and Kingdon do not have direct operations in India and are based in the US, which is not considered as a reciprocating territory for the purpose of enforcing judgments, said legal experts.

While Hindenburg has not clearly stated if it will formally reply to Sebi’s SCN, it disclosed that it is filing a right to information (RTI) request seeking details on meetings and calls between Sebi and Adani. “We will await Sebi’s response on whether it will provide basic transparency on its investigation.”

Sebi also observed that the Hindenburg report contained certain misrepresentations and inaccurate statements.  “The misrepresentations built a convenient narrative through selective disclosures, reckless statements and catchy headlines, in order to mislead readers of the report and cause panic in Adani group stocks, thereby deflating prices to the maximum extent possible and profit from the same,” it has said.

‘Barely managed breakeven’

Despite triggering an unprecedented fall in Adani group stocks, Hindenburg claimed it barely broke even on its Adani short. “The reality, as detailed in the SCN, is less dramatic. We only had one investor relationship in our Adani thesis. We have made $4.1 million in gross revenue through gains related to Adani shorts from that investor relationship. Net of legal and research expenses, we may come out ahead of breakeven,” the New York-headquartered firm added.

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