India’s markets regulator SEBI has slapped Hindenburg Research with a show cause notice for alleged “unfair trade practices” in its 2023 broadside against the Adani Group – a move that the US firm termed as ‘nonsense’ and an attempt to ‘silence and intimidate’ those exposing corruption.
The Securities and Exchange Board of India (SEBI) in the June 26 show cause notice charged Hindenburg of “deliberately sensationalising and distorting certain facts” in the damning January 2023 report on the Adani group as well as working with a New York hedge fund to make its bet.
Hindenburg, which published the notice on its website, said it made just USD 4.1 million from its declared positions on Adani stocks and criticised the regulator for not focusing its investigation into the January 2023 report “providing evidence” of the conglomerate creating “a vast network of offshore shell entities” and moving billions of dollars “surreptitiously” into and out of Adani public and private entities.
It said while SEBI was seeking to claim jurisdiction over a US-based investor, the regulator’s notice “conspicuously failed to name the party that has an actual tie to India: Kotak Bank,” which created and oversaw the offshore fund structure used by Hindenburg’s investor partner to bet against Adani. The regulator “masked the “Kotak” name with the acronym “KMIL”,” it added.
KMIL refers to Kotak Mahindra Investments Ltd, the asset management company.
While KMIL stated that Hindenburg was “never” its client, SEBI’s show cause notice said that Hindenburg’s client Kingdon Capital Management had invested in KMIL’s K-India Opportunities Fund, which created positions in Adani Enterprises Ltd prior to the report release and “a total profit of Rs 183.24 crore (USD 22.25 million)” thereafter.
Hindenburg had shared its report with Kingdon Capital prior to the release, that led to a rout in Adani group stock, wiping out over USD 150 billion in market value of the 10 listed entities at their lowest point.
Adani has repeatedly denied all allegations of wrong doing and most of its stocks have recouped losses since.
“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,” a KMIL spokesperson said. “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.”
Hindenburg said the SEBI’s notice “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.”
A show-cause notice is often a precursor to formal legal action that may include imposing financial penalties and barring participation in the Indian capital market.
SEBI has given Hindenburg 21 days to respond to its allegations.
In its 46-page notice, SEBI alleged a relationship between Hindenburg and Kingdon began in the autumn of 2022, months before the damning report was released. Kingdon created positions in Adani stocks to benefit from their decline when the report was released.
Hindenburg said it made about USD 4.1 million in gross revenue through gains related to Adani shorts from “one investor relationship” as well as USD 31,000 through its own “tiny” short of the group’s US bonds.
It did not name the investor.
After expenses related to its two-year investigation into Adani “we may come out ahead of break-even on our Adani Short,” said Hindenburg.
After the Hindenburg report, the Supreme Court asked SEBI to complete its investigation and set up a separate expert panel to look into regulatory lapses. The panel did not give any adverse report on Adani and the apex court too stated that no other probe other than one being done by SEBI was required.
“After 1.5 years of investigation, SEBI identified zero factual inaccuracies with our Adani research. Instead, the regulator took issue with things like our use of the word ‘scandal’ when describing multiple prior instances of Adani promoters being charged with fraud by Indian regulators, and our quoting of an individual that alleged SEBI is corrupt and works ‘hand in glove’ with conglomerates like Adani to help it skirt regulations,” it said.
The US firm said the show cause notice does resolve some questions: “Did Hindenburg work with dozens of firms to short Adani, making hundreds of millions of dollars? No – We had one investor partner, and net of costs we may barely come out above breakeven on our Adani short.
“Our work on Adani was never justifiable from a financial or personal safety perspective, but it is by far the work we are most proud of,” it said.
Hindenburg said it first received an email from SEBI and later a show cause notice outlining suspected violations of Indian regulations.
“To this day, Adani has still failed to address the allegations in our report, instead providing a response that ignored every key issue we raised and has offered blanket denials of subsequent media allegations,” it said, adding that its January 2023 report had “provided evidence of a vast network of offshore shell entities controlled by (group chairman) Gautam Adani’s brother, Vinod Adani, and close associates.
“We detailed how billions were surreptitiously moved through these entities, into and out of Adani public and private entities, often without related-party disclosures,” it said.
On the SEBI notice, it said, “Much of the notice seemed designed to imply that our legal and disclosed investment stance was something secret or insidious, or to advance novel legal arguments claiming jurisdiction over us. Note that we are a US-based research firm with zero Indian entities, employees, consultants or operations.”
The regulator, it said, claimed that the disclaimers in the report were misleading because the firm was “indirectly participating in the Indian securities market.
“This wasn’t a mystery, virtually everyone on earth knew we were short Adani because we prominently and repeatedly disclosed it,” it said.
“We suspect SEBI’s lack of mention of Kotak or any other Kotak board member may be meant to protect yet another powerful Indian businessman from the prospect of scrutiny, a role SEBI seems to embrace,” Hindenburg said.
