New Delhi: Several new revelations have come to light in the ongoing tussle between Hindenburg Research and the Securities and Exchange Board of India (SEBI) regarding the January 2023 report released by the US-based short-seller on the alleged corporate malpractices by the Adani Group.
Hindenburg’s response last night to a show-cause notice sent by the Indian market regulator included the fact that it barely made any money from its short position on Adani stocks, and that it had used a fund set up by India’s Kotak Mahindra Bank to execute these transactions.
In addition, Hindenburg said that it will file a Right to Information request with SEBI for the regulator to disclose details of its investigation into the allegations against Adani Group.
The investment research firm’s January 2023 report had alleged several counts of corporate malpractice by the Indian conglomerate, including undisclosed related party transactions, routing of funds through organisations owned by Adani group chairman Gautam Adani’s brother Vinod Adani, and share price manipulation.
The Adani Group has consistently denied all these charges.
How much money did Hindenburg make from its report?
Short selling is a trading strategy, where investors bet that the price of a particular stock or stocks will fall sharply in the near future, and aim to make a profit from this fall. This is what Hindenburg Research aimed to do by releasing its report on the Adani Group — it wanted the share and bond prices of the group to fall sharply.
The SEBI show-cause notice, dated 26 June, and made public by Hindenburg, said that a SEBI-registered foreign portfolio investor called ‘K India Opportunities Fund Limited – Class F’, which was partnered with Hindenburg, had opened a trading account and started trading in Adani Enterprises stocks, just a few days before the report was published.
It then squared-off its entire short position following the publication of the report, earning it a profit of Rs 183.24 crore ($22.25 million), according to the notice.
Hindenburg, however, said that its own earnings from its short position on Adani group were far lower.
“We have made around $4.1 million in gross revenue through gains related to Adani shorts from that investor relationship,” Hindenburg said in the response, posted on its website.
“Net of legal and research expenses (including time, salaries/compensation, and costs for a 2-year global investigation) we may come out ahead of break even on our Adani short,” it added.
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Kotak Mahindra Bank thrown into the fray
According to Hindenburg, while SEBI had apparently “tied itself in knots” to claim that it had jurisdiction over Hindenburg, the show-cause notice “conspicuously failed” to name an Indian company that was involved.
“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,” it noted. “Instead it simply named the K-India Opportunities fund and masked the “Kotak” name with the acronym ‘KMIL’.”
To be sure, SEBI’s notice does mention the name Kotak Mahindra (International) Limited in the context of its agreement with the Hindenburg-linked foreign portfolio investor.
Kotak Mahindra Bank, however, has clarified its position on the matter.
“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 bank said in a statement.
“The Fund was never aware that Hindenburg was a partner of any of its investors,” it added. “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.”
Kotak Mahindra Bank’s share price ended the day’s trading session down by 2.38 percent, following the mention of its name in Hindenburg’s response.
An RTI for transparency
Hindenburg made several other serious allegations in its response. It said that, based on its discussions with its sources in the Indian market, it found that “SEBI’s surreptitious aid of Adani commenced almost immediately post-publication of our January 2023 report”.
It alleged that following the publication of its report, the regulator began pressuring brokers to close short positions in Adani stocks “under the threat of expensive, perpetual investigations, effectively creating buying pressure and setting a ‘floor’ for Adani’s stocks at a critical time”.
Hindenburg then went on to outline some of the findings of the Supreme Court of India and SEBI itself, which resulted in further investigations into Adani being apparently stymied.
It cited two instances where Adani group chairman Gautam Adani apparently met SEBI Chairperson Madhabi Puri Buch in 2022. One of the meetings, it said, was to discuss the Adani group’s acquisition of cement companies ACC and Ambuja.
The second meeting, reportedly in October 2022, apparently disclosed “no specific agenda” according to an earlier RTI request, Hindenburg said.
“Looking to learn more about SEBI’s process, we are in the process of filing an RTI seeking the names of SEBI employees that worked on both the Adani matter and the Hindenburg matter, along with basic details on meetings and calls between SEBI and Adani, and its various representatives,” the short-seller’s response read.
“We will await SEBI’s response on whether it will provide basic transparency on its investigations,” it added.
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SEBI’s latest allegations
The SEBI notice said that the Hindenburg report “contained certain misrepresentations/inaccurate statements” that were meant to “mislead readers”.
“These misrepresentations built a convenient narrative through selective disclosures, reckless statements and catchy headlines, in order to mislead readers of the report and cause panic in Adani Group stocks, thereby deflating prices to the maximum extent possible and profit from the same,” the show-cause notice said.
These ‘misrepresentations’, SEBI said, had to do with the actions of the Customs Excise & Service Tax Appellate Tribunal (CESTAT), ‘misleading’ disclaimers on the part of Hindenburg regarding its financial interests in stocks in the Indian market, and that it resorted to “extrapolation and conjecture” in its report, which belied its claims of objectivity.
Finally, it also took objection to several allegations made by Hindenburg against SEBI itself, in which the short-seller alluded to corruption, bribery, and leniency to large corporate houses by the regulator.
Hindenburg’s scathing response
“Today we are sharing the entirety of this notice, frankly 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,” the short-seller’s response, posted on its website, read.
Hindenburg said that most of the notice seemed designed to show that its investment stance — which it termed “legal and disclosed” — was actually “something secret or insidious”, or to put forth “novel legal arguments” for SEBI to claim jurisdiction over Hindenburg.
“Note that we are a U.S.-based research firm with zero Indian entities, employees, consultants or operations,” it said.
The response also noted that SEBI’s notice, coming after 1.5 years of investigation, “identified zero factual inaccuracies” in Hindenburg’s research pertaining to the Adani Group.
“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,” Hindenburg said.
(Edited by Mannat Chugh)