Adani case | What Hindenburg Research said in response to SEBI's show cause notice

US short-seller Hindenburg Research, known for its explosive allegations against the Adani Group, has said it received a 46-page show cause notice from the Indian capital market regulator, SEBI (Securities and Exchange Board of India).

The notice accuses Hindenburg of violations related to its bets against Adani's stocks.

Hindenburg has labelled the notice as "nonsense" and "concocted to serve a pre-ordained purpose", suggesting it is an attempt to silence and intimidate those who reveal corruption and fraud by powerful individuals in India. The firm insists that its report, which alleged a "brazen stock manipulation and accounting fraud scheme over the course of decades" by the Adani Group, was based on solid evidence and full transparency.

It also said that it is in the process of filing an RTI, seeking the names of SEBI employees who worked on both the Adani and Hindenburg cases, along with basic details on meetings and calls between SEBI and Adani and its various representatives.

“We will await SEBI’s response on whether it will provide basic transparency on its investigations,” Hindenberg said.

The Hindenburg report

In January 2023, Hindenburg Research published an extensive report alleging that the Indian conglomerate Adani Group was operating “the largest con in corporate history.”

“Despite presenting overwhelming evidence, we anticipated fierce opposition, and our expectations were met,” the report said.

Hindenburg said the latest development involves a bizarre email from the Securities and Exchange Board of India (SEBI), ostensibly flagging a previous communication as a security risk and quarantining it. This email was soon followed by a 'Show Cause' notice, “which we believe is an attempt to silence and intimidate those exposing corruption in India.”

Key findings of Hindenburg report

The 106-page report on Adani Group, released in January 2023, detailed evidence of stock manipulation and accounting fraud. The key findings included:

1) A vast network of offshore shell entities controlled by Vinod Adani and close associates.

2) Billions moved through these entities without proper disclosures.

3) Evasion of minimum shareholder listing rules through opaque offshore fund operators.

The report included 32,000 words and 720 citations, meticulously substantiating these claims. Despite this, Adani has yet to address the findings directly, opting instead for deflections and blanket denials, Hindenburg said.

Hindenburg's defence

Hindenburg claimed that 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. This wasn’t a mystery, virtually everyone on earth knew we were short Adani because we prominently and repeatedly disclosed it, said Hindenburg.

When Hindenburg published its report, it clearly disclosed its short position on Adani stocks. This means Hindenburg had placed bets expecting Adani's stock value to decline, which aligns with its findings of financial malfeasance within the conglomerate. Without revealing the investor's name, Hindenburg stated it earned US$ 4.1 million in gross revenue from "gains related to Adani shorts through that investor relationship" and only US$ 31,000 from its short position on the conglomerate's US bonds.

Hindenburg also said SEBI focused on Hindenburg’s involvement but did not mention Kotak Bank directly, even though Kotak played a significant role. Kotak Bank, a major Indian bank, helped set up the offshore fund structure that Hindenburg's investor used.

“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”.

Uday Kotak, the bank's founder, 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. (Since the report, Kotak Mahindra Bank's shares fell up to 2 per cent to the day's low of ₹1,768 on BSE).

DRI findings

Hindenburg, in its report following the SEBI notice, pointed out that its report detailed how a Directorate of Revenue Intelligence (DRI) investigation found Adani had engaged in circular trading of diamonds, earning ₹6.8 billion (US $151 million) in illicit export credits. “We then described how CESTAT (Customs Excise & Service Tax Appellate Tribunal), 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 ₹6.8 billion scheme by Adani that resulted in a 239-page order from the Commissioner of Customs detailing evidence of fraud, a ₹250 million (US $4.6 million) fine, and extensive subsequent legal proceedings.

Again, they took exception to the fact that we called this a “scandal”, the report said. 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.

Highlights of Hindenburg Research’s Report on SEBI notice:

SEBI’s show cause notice

1) Bizarre initial email

SEBI initially flagged its own message as a security risk and quarantined it, followed by a 'Show Cause' notice to Hindenburg Research.

2) Notice contents

Background information: Summarised the publication of Hindenburg's report and their relationship with an investor shorting Adani.

Jurisdiction claims: SEBI attempted to claim jurisdiction over Hindenburg despite the firm being US-based with no Indian operations.

Misrepresentation accusations: SEBI alleged misrepresentation in the report but found no factual inaccuracies.

3) Key arguments by SEBI

Use of the term “scandal”: Objected to Hindenburg’s use of the word “scandal” in describing past Adani regulatory issues.

Description of regulatory actions: Criticised the portrayal of lenient punishments received by Adani entities.

Quoting of sources: SEBI found it “reckless” for Hindenburg to quote a banned broker critical of SEBI.

4) Report findings

Stock manipulation and accounting fraud: Detailed evidence of Adani Group engaging in stock manipulation and accounting fraud over decades.

Offshore entities: Exposed a network of offshore shell entities controlled by Vinod Adani and close associates, used to move billions without proper disclosures.

Evasion of rules: Highlighted how Adani used opaque offshore fund operators to evade minimum shareholder listing rules.

5) Reactions to the report

Lack of direct response: Adani has not directly addressed the allegations, instead offering blanket denials and deflections.

Corroboration: At least 40 independent media investigations have corroborated and expanded on Hindenburg’s findings.

Media investigations and corroborations

Support from independent media: Multiple media outlets have found evidence supporting Hindenburg's allegations, including:

Forbes: Indicated Adani Group may have funnelled its own money to buy its own FPO.

Financial Times: Confirmed risks related to Adani’s leverage and questioned its financial practices.

Reuters and Bloomberg: More details about Adani’s undisclosed offshore dealings were unlocked.

Implications for corporate governance in India

Regulatory concerns: SEBI’s actions appear to protect powerful conglomerates over investor interests, reflecting broader issues in corporate governance and regulatory enforcement in India.

The message to Indian companies is clear: fraudulent activities may only result in minor repercussions.

Mention of Kotak's role in the report

1) Show cause notice Implications

SEBI's notice claimed that disclaimers in Hindenburg's report were misleading due to the firm's participation in the Indian securities market, specifically mentioning the role of Kotak Bank:

"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."

2) Unnamed party with ties to India

Despite SEBI's focus on Hindenburg, it did not name Kotak Bank, which had an actual tie to India.

"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."

3) Masking the name

SEBI masked the name of Kotak Bank with the acronym "KMIL" in the notice.

"Instead, it simply named the K-India Opportunities fund and masked the 'Kotak' name with the acronym 'KMIL'."

4) Uday Kotak's role

Uday Kotak, founder of Kotak Bank, led SEBI’s 2017 Committee on Corporate Governance.

"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."