The Indian Express (Delhi Edition)
Why SEBI accused Hindenburg of breaking Indian law over its Adani report
US-BASED short-seller Hindenburg Research announced Monday that it had received a show cause notice from India’s capital markets regulator SEBI for short-selling Adani Enterprises Ltd (AEL) stock, immediately before and after the release of its report last year accusing Adani of stock manipulation and accounting fraud.
Hindenburg rejected the notice and termed it “nonsense”. SEBI has not responded to requests seeking a comment.
What did the Hindenburg report say?
On January 24, 2023, Us-based investor research firm Hindenburg Research released a report accusing the Gautam Adaniled Adani Group of “brazen stock manipulation and accounting fraud scheme over the course of decades”.
The report was released ahead of the Rs 20,000-crore Follow-on Public Offer (FPO) of Adani Enterprises Ltd, the flagship entity of the ports-to-energy conglomerate. Adani companies’ shares tanked (most have now recovered) after the report was released and the fully-subscribed FPO was later called off by the Group.
Adani denied all allegations and accused Hindenburg of leading a “calculated attack on India, the independence, integrity and quality of Indian institutions, and the growth story and ambition of India”.
What is SEBI’S show cause notice?
Hindenburg said on July 1 that “on the morning of June 27” it received a “bizarre email ostensibly from SEBI”. It claimed to have received another email, a 46-page show cause notice, which outlined suspected violations of Indian regulations.
SEBI’S notice stated that Hindenburg appeared to have colluded with certain entities to use advance knowledge of non-public information to build short positions in
AEL shares and book profits.
The notice named Hindenburg Research, its founder Nathan Anderson, partner-investor Mark Kingdon, and three entities owned or controlled by Kingdon: Kingdon Capital Management LLC, M Kingdon Offshore Master Fund LP, and K India Opportunities Fund (KIOF) - Class F.
SEBI has alleged that on November 30, 2022, the short seller shared a draft of its Adani
Group report exclusively with its client Kingdon Capital Management. Mark Kingdon held 99% stakeholding in Kingdon Capital and was the ultimate beneficiary owner (UBO) of the M Kingdon Offshore Master Fund LP, which, on December 28, 2022, started the process of subscribing to 100 per cent Participating Redeemable (PR) shares of KIOF Class F, the Foreign Portfolio Investor (FPI).
The FPI then took short positions in the futures of AEL before the Hindenburg
Report was published. It then squared off its entire short position after the report was released, making a profit of Rs 183.24 crore.
How has Hindenburg responded?
Hindenburg said that instead of “meaningfully pursuing the parties that ran a secret offshore shell empire engaging in billions of dollars of undisclosed related party transactions through public companies”, the regulator “seems more interested in pursuing those who expose such practices”.
It added, “Much of the show cause 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.”
SEBI, Hindenburg said, claimed that the disclaimers in its report were misleading because we were “indirectly participating in the Indian securities market,” and, therefore, were short [on] Adani. “This wasn’t a mystery,” Hindenburg said — “virtually everyone on earth knew we were short Adani because we prominently and repeatedly disclosed it”.
It also alleged that SEBI may have “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”.
Why did Hindenburg bring in Kotak?
In its statement, Hindenburg said that SEBI’S notice had “conspicuously failed to name…kotak Bank, one of India’s largest banks and brokerage firms…, which created and oversaw the offshore fund structure used by our investor partner [Kingdon] to bet against Adani. Instead, it simply named the K-india Opportunities fund and masked the ‘Kotak’ name with the acronym ‘KMIL’”.
“We suspect SEBI’S lack of mention of [Uday] 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,” it said.
In response, Kotak Mahindra Bank said that KIOF is a Sebi-registered FPI, established in 2013, and it follows due KYC procedures.
“Kotak Mahindra International Limited (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. 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,” a Kotak Mahindra spokesperson said.