MumbaiHindenburg Research dismissed as ‘nonsense’ a purported show-cause notice from the Securities and Exchange Board of India (SEBI), that has said the short-selling hedge fund engaged in fraudulent and unfair trade practices concerning trading in Adani Enterprises’ stock and violated Indian regulations.

The US-based investment research firm stated on its website the notice from SEBI, has been “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.” It added that SEBI seemed to be more interested in “pursuing those who expose such practices.”

Calls and text messages to a SEBI spokesman on the show-cause notice did not elicit any response.

In January 2023, the hedge fund had come out with a 106-page report on the Adani Group which claimed that the group had engaged in brazen stock manipulation and accounting fraud scheme over several decades. The report resulted in Adani group stock prices crashing and wiping out over $100 billion of investor wealth in the shares.

The group was virtually given a clean chit by a Supreme Court-mandated committee to look into the allegations and subsequent cases have also been dismissed. An investigation by SEBI has also remained inconclusive.

Hindenburg on its website said that SEBI has neglected its responsibility to detect and stop frauds and “seemingly doing more to protect those perpetrating fraud than to protect investors being victimized by it.”

Sebi show cause notice

According to the SEBI show-cause – a link for which was put up by Hindenburg on its website – the Hindenburg report in 2023 contained “certain misrepresentations/inaccurate statement. These misrepresentations built a convenient narrative through selective disclosures, reckless statements and catchy headlines. In order to mislead readers of the report and caused panic in Adani Group stocks, thereby deflating prices to the maximum extent possible and profit from the same.”

“Prior to the release of the Hindenburg Report, concentration in short selling activity was observed in the derivates of AEL,” the Sebi notice said. After the release of the report, shares of Adani Enterprises fell 59 per cent during the period January 24, 2023 and February 22, it pointed out.

It also said that the disclaimer by the short seller on holding positions in the Adani group stock “only through non-Indian traded securities was misleading since it concealed the complete extent of its financial interest in companies which were the subject of its research report due to Hindenburg’s direct stake in profits from positions taken by the FPI in the future of AEL on the Indian stock exchange.”  It added that the statement portraying the non-association of Hindenburg with the Indian markets was not true.

The notice has directed Hindenburg Research to show-cause as to why inquiries should not be held against them and directions for disgorging profits unlawfully made. A reply has been sought within 21 days of receipt of the notice and indicate their preference for a personal hearing on the matter.

One of the entities named in the report and involved in the actual transactions was K India Opportunities Fund Class F, a Sebi registered Foreign Portfolio Investor, and part of the Kotak group. The Sebi notice said that the fund opened a trading account and started trading in the scrips of Adani Enterprises just a few days prior to the publication of the report and then squared off its entire short position post the publication making a profit of $22.25 million. Another Kotak group entity, Kotak Mahindra International Ltd was the investment manager to Hindenburg’s client Kingdon Capital, on whose behalf the transaction was made.

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