Hindenburg’s Scathing Report on Adani Group: A Clash with SEBI

Allegations of Fraud and Regulatory Complicity Shake Investor Confidence

In January 2023, Hindenburg Research, a U.S.-based short-selling research firm, published an extensive report accusing the Indian conglomerate Adani Group of conducting “the largest con in corporate history.” This 106-page document, supported by 720 citations, detailed alleged stock manipulation and accounting fraud involving offshore shell entities controlled by Vinod Adani, the brother of Adani Group’s chairman, Gautam Adani.

On June 27, 2024, Hindenburg revealed that the Securities and Exchange Board of India (SEBI) had issued a ‘Show Cause’ notice to the firm. This notice followed an earlier email flagged as a security risk and quarantined by SEBI itself, which Hindenburg initially suspected as a phishing attempt.

The notice from SEBI, which Hindenburg has now made public, is perceived by the research firm as an attempt to intimidate and silence those exposing corruption. Hindenburg asserts that SEBI’s actions align with the broader Indian government efforts to suppress criticism of powerful figures like Adani.

In their original report, Hindenburg provided evidence of Adani’s use of offshore entities to conduct undisclosed related-party transactions, evading minimum shareholder listing rules. They also highlighted the resignation of Deloitte as the statutory auditor for Adani Ports, citing undisclosed related-party transactions.

A significant point from Hindenburg’s 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. The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) dismissed the findings, effectively ignoring the earlier DRI conclusions. SEBI did not allege any aspect of this description was false. Instead, SEBI argued that CESTAT looked at the earlier case and accused Hindenburg of “sensationalizing or distorting certain facts” by using the word “scandal” to describe the scheme, which 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.

Despite the gravity of these allegations, Hindenburg criticizes SEBI for focusing on the firm’s use of words like “scandal” rather than addressing the substantive issues raised. SEBI’s investigation, which lasted 1.5 years, failed to identify any factual inaccuracies in Hindenburg’s report but instead scrutinized technical aspects and disclaimers.

Hindenburg reported gross revenue of approximately $4.1 million from gains related to Adani shorts through an investor relationship, and an additional $31,000 from their own short position in Adani U.S. bonds. However, after accounting for legal and research expenses over a two-year global investigation, they may only break even.

The firm anticipated potential retaliation, noting the rise in the killing or jailing of journalists in India and the country’s declining press freedom scores. Hindenburg suspected that Indian authorities might concoct a case to scare them or others out of the market.

Hindenburg’s findings have been corroborated by at least 40 independent media investigations, further substantiating claims of widespread fraud. However, SEBI’s alleged reluctance to pursue the Adani Group seriously, coupled with reports of pressure on brokers to close short positions in Adani stocks, suggests a protective stance towards the conglomerate.

The clash between Hindenburg and SEBI underscores concerns about regulatory integrity and corporate governance in India. Hindenburg remains resolute in its commitment to exposing malfeasance, despite potential repercussions from Indian authorities.

As the controversy continues, it raises critical questions about the efficacy of India’s regulatory framework in protecting investors and upholding corporate accountability.