US-based Hindenburg Research has made public a show-cause notice (SCN) it received from Securities and Exchange Board of India (SEBI), calling the SCN "an attempt to silence and intimidate those who expose corruption and fraud perpetrated by the most powerful individuals in India." On 24 January 2023, the short-seller accused the Adani group of engaging in long-term stock manipulation and accounting fraud through a network of offshore entities.
In
its response, Hindenburg says, "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. These actions send a clear message to every public company in India: Are you having a difficult time with your quarterly results? Do you want your stock price to be higher? (Who doesn't?) Simply have your brother or another relative set up an offshore shell empire to buoy up the stock or rosy up your financials."
"The incentives are clear: The gains from fraudulent activities outweigh the small risks of a potential' slap on the wrist' fine from regulators. And based on the hundreds of tips and leads we received following the Adani report, Adani is by no means the only lurking and ongoing issue SEBI has failed to address. The message sent to investors in India is equally loud: You have no real protection from fraud. Corporate governance in India is a myth for businessmen that can buy influence," it added.
"Meanwhile," Hindenburg says, "The (Indian) government has once again sent the message that critics of those in power will be punished, whether by regulatory action or strategic media leaks. We expect SEBI may try to impose 'bans' or fines on us to clamp down on the prospect of more criticism of Indian companies."
Here Are the Details of SEBI's SCN as Published by Hindenburg…
The initial sections of SEBI's 46-page Show Cause Notice to us outlined background on the Hindenburg report's publication and an explanation of our relationship with an investor that expressed a short position in Adani.
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 U.S.-based research firm with zero Indian entities, employees, consultants or operations.
Some of these arguments seemed circular. For example, the regulator claimed that the disclaimers in our report were misleading because we were "indirectly participating in the Indian securities market," and, therefore, were short Adani. [Pg. 30] This wasn't a mystery—virtually everyone on earth knew we were short Adani because we prominently and repeatedly disclosed it.
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 and brokerage firms founded by Uday Kotak, which created and oversaw the offshore fund structure used by our investor partner to bet against Adani. Instead it simply named the K-India Opportunities fund and masked the "Kotak" name with the acronym "KMIL".[2]
Uday Kotak, founder of the bank, personally led SEBI's 2017 Committee on Corporate Governance. 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.
SEBI's "Show Cause Notice": After 1.5 Years Of Investigation, SEBI Identified Zero Factual Inaccuracies With Our Adani Research
Instead, The Regulator Took Issue With Things Like:
i. Our Use Of The Word "Scandal" When Describing Multiple Prior Instances of Adani Promoters Being Charged With Fraud By Indian Regulators; And
ii. Our Quoting Of An Individual That Alleged SEBI Is Corrupt And Works "Hand In Glove" With Conglomerates Like Adani To Help It Skirt Regulations
Buried all the way down on page 24 of the 46-page notice, SEBI finally touched on the substance of our research, where it made the nebulous allegation that our report "contained certain misrepresentations/inaccurate statements" meant to "mislead readers."
Such alleged misleading statements are generally the crux of any fraudulent "scheme", thus these findings would be crucial for a case advanced by any credible regulator.
After 1.5 years of investigation, and undoubtedly countless hours and personnel examining every letter of our 106-page report, SEBI then detailed the supposed inaccurate statements it found:
1. Our report detailed how a Directorate of Revenue Intelligence (DRI) investigation found Adani had engaged in circular trading of diamonds, earning INR 6.8 billion (U.S. $151 million) in illicit export credits. We then described how CESTAT, the tribunal that handles appeals, dismissed the findings, effectively ignoring the earlier DRI conclusions.
SEBI did not allege any aspect of our description was false. Rather, it argued that CESTAT looked at the earlier case and alleged that we "sensationalised or distorted certain facts" by using the word "scandal" to describe the prior alleged INR 6.8 billion scheme by Adani that resulted in a 239-page order from the Commissioner of Customs detailing evidence of fraud, an INR 250 million (U.S. $4.6 million) fine, and extensive subsequent legal proceedings.
Again, they took exception with the fact that we called this a "scandal."
SEBI also argued that we "cherry-picked facts" by omitting that the Supreme Court later declined to take up the case on appeal, a completely irrelevant piece of information that in no way alters any aspect of our findings.
2. Our report pointed out a 2007 SEBI ruling alleging that promoters of Adani worked with Ketan Parekh, perhaps India's most notorious stock market manipulator, to manipulate shares in Adani.
Our report explained how Adani Group entities initially received bans for their roles, but these were later reduced to token fines.
Once again, SEBI did not allege any aspect of this was false. Rather, SEBI claimed that it was a misrepresentation to call the reduction in punishment "leniency." Note that the Cambridge dictionary definition of "leniency" is "treatment in which someone is punished or judged less strongly or severely than would be expected."
3. An apparently offended SEBI also claimed our report was not false, but rather "reckless" for quoting a banned broker with specific experience dealing with SEBI who detailed how the regulator was fully aware that firms like Adani used complex offshore entities to flout rules on minimum public shareholder ownership, and that the regulator participated in the schemes due to bribes.
SEBI called the source "unreliable" as a banned broker. Note that the sole reason SEBI is aware that the broker was banned is because we volunteered this information up front, writing in our report that the broker was banned in order to give readers the transparency and context needed to make their own judgements on the statements.
Then, with a fairly breathtaking lack of self-awareness, SEBI claimed that "such statements affect market integrity by shaking the trust of investors in the regulatory framework."
We can't help but wonder if protecting perpetrators of fraud while attacking those who expose it shakes the trust of investors in the regulatory framework far more than our accurate and fully-contextualised quoting of a source.
4. The remaining issues highlighted by SEBI had nothing to do with the content of our research and were instead focused on technical elements of our disclaimer. For example, SEBI took issue with our disclaimer that fairly described how we were short Adani—through a deal with an investor partner who was indirectly short Adani derivatives through a non-Indian, offshore fund structure.
5. Finally, in an apparent misreading of our report's disclaimer, SEBI said that we were falsely "claiming objectivity" when we wrote that information in the report is "presented 'as is,' without warranty of any kind, whether express or implied…"
Far from "claiming objectivity," the very disclaimer language cited by SEBI was explicitly a lack of a claim—stating that we made no assurances to quality or other features of the information. In fact, we disclosed a short position in the very first line of our report and prominently again at the end in big bold letters so readers could weigh the potential for bias given that we stood to benefit from a decline in Adani shares. We then encouraged every reader to do their own research.
In brief: As far as alleged "inaccuracies" with our research, that was all SEBI came up with: nothing. We encourage readers to review the notice for themselves and draw their own conclusions.
Since Our Initial Report, At Least 40 Independent Media Investigations Have Corroborated And Expounded On Our Findings Or Have Uncovered New Issues Of Suspected Fraud Or Malfeasance At Adani
That our research stood the test of SEBI's investigation shouldn't be a surprise.
While many have tried to wrap our research into a narrative on "Adani vs. Hindenburg," the reality is that the case moved beyond our initial work long ago. It has now become Adani versus a mountain of evidence, now corroborated and expounded on by dozens of independent media investigations and subsequent events that have supported our findings.
