Sebi issues showcause notices to Hindenburg Research, five others

Sebi’s investigation found that these positions were liquidated after the report was released, netting a “significant” profit of ~Rs 183 crore. New York-based Hindenburg Research dismissed Sebi’s report as “nonsense” and claimed that it barely broke even – a total of $4.1 million in gross revenue from profits related to Adani shorts.

After Hindenburg Research received the 46-page SCN, it claimed in a blog post on Tuesday: “As per our insights from conversations with sources in the Indian market, Sebi’s covert assistance to Adani began almost immediately after the publication of our January 2023 report.”

According to Sebi’s findings, Kingdon allegedly entered into an agreement with Hindenburg in May 2021 to share 30 percent of profits from trading in securities under investigation. The SCN alleges that the disclaimer in Hindenburg’s report, stating that it only had positions through non-Indian traded securities, was misleading as it concealed its direct interest in the profits from Kingdon’s positions.

“The statement indicated that Hindenburg had no links with the Indian markets, which was not true,” Sebi said in the SCN dated June 26.

But the US short-seller dismissed Sebi’s notice as “an attempt to silence and intimidate those exposing corruption and fraud.” It also alleged: “Following our report, we were told that behind the scenes, Sebi was pressuring brokers to close short positions in Adani under the threat of costly, ongoing investigations, effectively creating buying pressure and putting a ‘floor’ on Adani’s shares at a critical time.”

The six suitors include Hindenburg founder Nathan Anderson, Kingdon Capital, Kingdon’s asset management business, Kingdon Offshore Master Fund and K India Opportunities Fund (KIOF), a Mauritius-based, Sebi-registered foreign portfolio investor (FPI) that has created short positions in Adani Enterprises (AEL).

In a statement, a spokesperson for Kotak Mahindra International Limited (KMIL) said KIOF is regulated by the Financial Services Commission of Mauritius. The fund was established in 2013 to enable foreign clients to invest in India and follows proper KYC procedures while onboarding clients, and all investments are made in compliance with all applicable laws. “We have cooperated with regulators in relation to our activities and continue to do so.”

“Kotak Mahindra International and KIOF unequivocally state that Hindenburg was never a client of the company nor was it an investor in the fund. The fund was never aware that Hindenburg was a partner of any of its investors. KMIL has also received confirmation and assurance from the fund’s investors that its investments are being made as a principal and not on behalf of any other person,” the KMIL spokesperson said.

According to the SCN, Hindenburg Research exclusively shared a draft of its Adani report with Kingdon on November 30, 2022. Shortly thereafter, Kingdon Offshore Master Fund began subscribing to 100 percent of the participating redeemable (PR) shares of the KIOF Class F fund. On January 10, 2023, KIOF’s derivatives trading account was activated, building short positions for 850,000 AEL shares.

Following the publication of the report, AEL shares fell sharply, falling by a total of 59 percent between January 24 and February 22, 2023.

Sebi has also accused Hindenburg of violating regulations by conducting research on Adani group companies listed in India without registering under the Research Analysts (RA) Regulations. “The report included written or electronic communication including research analysis or opinions on securities listed in India and was a ‘research report’ governed by the RA Regulations. However, Hindenburg did not enter into any agreement with any research analyst or research entity (RE) registered under the RA Regulations as required by Regulation 4 of the RA Regulation,” the market regulator said in the SCN.

The domestic securities regulator has given the notices 21 days to respond, after which it may impose strict measures on them. However, the enforcement of the order remains uncertain as Hindenburg and Kingdon have no direct operations in India and are based in the US, which is not considered a reciprocal territory for the purpose of enforcement of judgments, legal experts said.

While Hindenburg has not clearly indicated whether it will formally respond to Sebi’s SCN, it has revealed that it is filing a request for information (RTI) seeking details of meetings and conversations between Sebi and Adani. “We are waiting for Sebi’s response on whether it will provide basic transparency on its investigation.”

Sebi also noted that the Hindenburg report contained certain misrepresentations and incorrect statements. “The misrepresentations constructed a convenient narrative through selective disclosures, reckless statements and catchy headlines, to mislead readers of the report and create panic in the shares of Adani group, thereby driving down prices as much as possible and extracting profits,” the report said.

‘Barely reached break-even’

Despite causing an unprecedented fall in Adani Group shares, Hindenburg claimed it was barely breaking even on its Adani short. “The reality, as detailed in the SCN, is less dramatic. We had only one investor relationship in our Adani thesis. We generated $4.1 million in gross income from profits related to Adani shorts from that investor relationship. After deducting legal and investigation costs, we may be above break-even,” the New York-based firm added.

(Disclaimer: Entities controlled by the Kotak family have a significant stake in Business Standard Pvt Ltd)

First print: 03 Jul 2024 | 00:52 IST