How SEBI's notice and Hindenburg Research’s response impacts Adani

Hindenburg Research Adani row: Indian billionaire Gautam Adani got yet another relief when the Indian market regulator SEBI (Securities and Exchange Board of India) issued a notice to the US short-seller, Hindenburg Research.

This comes after the Supreme Court's relief to the Adani group in January 2024.

Hindenburg Research has responded strongly to the SEBI's notice, labelling severe charges against the Indian capital market regulator. 

However, the stock market experts are confident that SEBI's move will bring confidence among the domestic and offshore investors regarding Adani group companies. They said that SEBI's notice to Hindenburg Research would also set a benchmark for other overseas research firms.

What does SEBI's notice mean?

On how SEBI notice to the US short seller would affect Adani group companies, Sandeep Pandey, Founder of Basav Capital, said, "SEBI's notice to Hindenburg Research has come after Supreme Court dismissed requests for creating a special investigation team (SIT) or transferring the probe into the allegations levelled by Hindenburg against the Adani Group to the Central Bureau of Investigation (CBI).”

Mr. Pandey added: “The SEBI's move would bring confidence among domestic and overseas investors regarding Adani group companies. This move would also set a benchmark for other offshore research firms before any such reports regarding a standalone company or a group."

Legal implications for Hindenburg?

On how this SEBI's notice will affect Hindenburg Research, Manish Chowdhury, Head of Research atStoxBox, said, "Following last year's allegations of Hindenburg on Adani Group of improper use of tax haven and irregularities in corporate governance, SEBI has issued a "show cause" notice to Hindenburg over its short bet on the Adani Group. Though Hindenburg has questioned the notice from SEBI, we believe the ground looks set for a long legal battle between Hindenburg on one side and the market regulator on the other. We also do not rule out other revelations from both sides as we move forward. However, we do not foresee a major drawdown on Adani Group stocks. The Group companies have addressed multiple issues, including deleveraging the balance sheet, improving corporate governance, reducing pledged shares, etc."

"For Hindenburg Research, this notice could mean they are facing regulatory scrutiny or even potential legal consequences, depending on the findings of SEBI's investigation," said Amit Goel, Co-Founder & Chief Global Strategist at Pace 360.

Hindenburg's reply to SEBI's notice

Responding strongly to the SEBI's notice, Hindenburg Research replied on its website, "On the morning of June 27, 2024, our firm received a bizarre email, ostensibly from SEBI, alerting us that SEBI had flagged its message to us that we never received as an apparent security risk, and that the regulator had "quarantined" it for its safety. Today, we are sharing the entirety of this notice 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."

"This, at first, struck us as a possible targeted phishing attempt. It was only later that day that we received another email, again ostensibly from SEBI, with a 'Show Cause' notice, a letter from the regulator outlining suspected violations of Indian regulations," the US short seller added.

Sticking to its findings against the Adani group companies, the Hindenburg Report said, "To this day, Adani (group) 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."

Counter charge on SEBI

Counter charging the Indian market regulator, the US short seller said "that a securities regulator would be interested in meaningfully pursuing the parties that ran a secret offshore shell empire engaging in billions of dollars of undisclosed related party transactions through public companies while propping up its stocks through undisclosed share ownership via a network of sham investment entities. Instead, SEBI seems more interested in pursuing those who expose such practices. This stance is broadly in line with the actions of other elements of the Indian government, which have sought to arrest 4 journalists for writing critical articles about Adani and expelled members of parliament who were critical of Adani."

"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 Hindenburg Research added.

On Monday, the US short seller said that Indian market regulator SEBI had sent a letter outlining suspected violations over its short bet against Adani Group last year and revealed it might "barely come out above breakeven" on its trade.

Five key points from the Hindenburg rebuttal 

1. Context around the allegations, show cause notice: For context, our original report was 106 pages, with 32,000 words, and included 720 citations, collectively detailing evidence that Adani “engaged in a brazen stock manipulation and accounting fraud scheme over the course of decades.”... “The report provided evidence of a vast network of offshore shell entities controlled by 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.”

2.  Alleges SEBI aiding Adani: “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. 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. When pressed by the public and the Supreme Court to investigate the issues, SEBI appeared to flounder."

3. Says SEBI found no inaccuracies with research: It said the regulator found “zero” inaccuracies in their Adani Research but took issue with word usage and alleged corruption charges against SEBI itself instead. 

4. On financial gains from Adani report: Hindenburg denied substantial financial gains and said it was upfront about the one existing investor relationship.

5. On SEBI's role In investigating the Adani allegations: Hindenburg claimed SEBI has “neglected its responsibility” and only handed out a “slap on the wrists” to powerful corporates.

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