Hindenburg Research responds to SEBI on Adani show cause notice: Five key points of defence

Adani-Hindenburg update: In a blog post dated July 1, Hindenburg Research responded to the Securities and Exchange Board of India's (SEBI) show cause notice, denouncing it as baseless and intended to silence their allegations of fraud against the Adani Group. The blog post also outlined “suspected violations of Indian regulations”.

Hindenburg revealed receiving what they termed a "bizarre email" from SEBI, which they initially disregarded, only realizing its significance after a subsequent communication titled 'Show Cause Notice'.

The research firm said it shares the full notice "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." It linked the show cause notice in a PDF document via Slideshare online.

Hindenburg said they were “aware” SEBI was “grappling” with how to respond to a United States-based research firm with no operations in India after they alleged that Adani Group was operating “the largest con in corporate history”.

It stated that they “anticipated fierce opposition” to the report “regardless of how comprehensive and truthful our body of evidence was”, adding that SEBI “seems more interested in pursuing those who expose such practices” and that the regulator's stance is “broadly in line with the actions of other elements of the Indian government which have sought to arrest 4 journalists for writing critical articles about Adani and expelled members of parliament who were critical of Adani.”

Key Points From The Hindenburg Research Rebuttal:

1. Context Around The Allegations, Show Cause Notice: For context, our original report was 106 pages, with 32,000 words, and included 720 citations, collectively detailing evidence that Adani “engaged in a brazen stock manipulation and accounting fraud scheme over the course of decades.”

• “The report provided evidence of a vast network of offshore shell entities controlled by Gautam Adani’s brother, Vinod Adani, and close associates. We detailed how billions were surreptitiously moved through these entities, into and out of Adani public and private entities, often without related-party disclosures.”
• “We also detailed how a network of opaque offshore fund operators surreptitiously helped Adani evade minimum shareholder listing rules, citing numerous public documents and interviews to substantiate the allegations.”
• “Shortly after our report, in August 2023, “Big-4” auditor Deloitte resigned from its role as statutory auditor for Adani Ports, citing undisclosed related-party transactions flagged in our report as the basis for a qualified opinion that accompanied its resignation.”
• “Following our initial Adani report, at least 40 independent media investigations corroborated or expounded on our findings, presenting evidence of widespread fraud by Adani against shareholders and Indian taxpayers, as detailed later.”
• “To this day, Adani has still failed to address the allegations in our report, instead providing a response that ignored every key issue we raised and has offered blanket denials of subsequent media allegations.”

2. Alleges SEBI Aiding Adani: “Our understanding from discussions with sources in the Indian market is that SEBI’s surreptitious aid of Adani commenced almost immediately post-publication of our January 2023 report. Following our report, we were told that SEBI 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. When pressed by the public and the Supreme Court to investigate the issues, SEBI appeared to flounder."

• “Later, SEBI claimed to be unable to investigate further. Court documents showed that SEBI had conveniently “drawn a blank” and that further enquiry could be a “journey without a destination,” underscoring its inability or unwillingness to investigate serious allegations against Adani. The media has reported that SEBI will likely impose mere token technical violations on the Adani Group despite the breadth and magnitude of the allegations. In late June 2024, Adani CFO Jugeshinder Singh described some regulator notices aimed toward the group as “trivial,” apparently writing off the prospect of their severity even before the process was concluded. This confidence may be derived in part through Adani’s relationship with SEBI.”
• “Looking to learn more about SEBI’s process, we are in the process of filing an RTI seeking the names of SEBI employees who 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. We will await SEBI’s response on whether it will provide basic transparency on its investigations.”
• “The initial sections of SEBI’s 46-page Show Cause Notice outlined the background of the Hindenburg report’s publication and an explanation of our relationship with an investor who expressed a short position in Adani. Much of the 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 U.S.-based research firm with zero Indian entities, employees, consultants or operations.”
• “Some of these arguments seemed circular. For example, the regulator claimed that the disclaimers in our report were misleading because we were “indirectly participating in the Indian securities market” and, therefore, were short Adani. This wasn’t a mystery—virtually everyone on earth knew we were short Adani because we prominently and repeatedly disclosed it.”
• “While SEBI seemingly tied itself in knots to claim jurisdiction over us, its notice conspicuously failed to name the party that has an actual tie to India: 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. Instead, it simply named the K-India Opportunities fund and masked the “Kotak” name with the acronym “KMIL”. Uday Kotak, founder of the bank, personally led SEBI’s 2017 Committee on Corporate Governance. We suspect SEBI’s lack of mention of 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.”

3. Says SEBI Found No Inaccuracies With Research: It said the regulator found “zero” inaccuracies in their Adani Research but took issue with word usage and alleged corruption charges against SEBI itself instead.

• “SEBI’s “Show Cause Notice”: After 1.5 years of investigation, SEBI identified zero factual inaccuracies with our Adani Research. Instead, the regulator took issue with things like:

1. Our use of the word “scandal” when describing multiple prior instances of Adani promoters being charged with fraud by Indian regulators; and
2. Our quoting of an individual that alleged SEBI is corrupt and works “hand in glove” with conglomerates like Adani to help it skirt regulations.”

• “Buried all the way down on page 24 of the 46-page notice, SEBI finally touched on the substance of our research, where it made the nebulous allegation that our report “contained certain misrepresentations/inaccurate statements” meant to “mislead readers.” Such alleged misleading statements are generally the crux of any fraudulent “scheme”, thus these findings would be crucial for a case advanced by any credible regulator.”
• “SEBI did not allege any aspect of our description was false. Rather, it argued that CESTAT looked at the earlier case and alleged that we “sensationalized or distorted certain facts” by using the word “scandal” to describe the prior alleged INR 6.8 billion scheme by Adani that 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. Again, they took exception to the fact that we called this a “scandal.” SEBI also argued that we “cherry-picked facts” by omitting that the Supreme Court later declined to take up the case on appeal, a completely irrelevant piece of information that in no way alters any aspect of our findings.”
• "On allegations that Adani "notorious stock manipulator" Ketan Parekh manipulated shares in Adani: “Once again, SEBI did not allege any aspect of this was false. Rather, SEBI claimed it was a misrepresentation to call the reduction in punishment “leniency.” The Cambridge Dictionary defines “leniency” as “treatment in which someone is punished or judged less strongly or severely than expected.”
• “An apparently offended SEBI also claimed our report was not false, but rather “reckless” for quoting a banned broker with specific experience dealing with SEBI who detailed how the regulator was fully aware that firms like Adani used complex offshore entities to flout rules on minimum public shareholder ownership, and that the regulator participated in the schemes due to bribes. SEBI called the source “unreliable” as a banned broker. Note that SEBI is aware that the broker was banned because we volunteered this information up front, writing in our report that the broker was banned to give readers the transparency and context needed to make their own judgements on the statements.”
• “Then, with a fairly breathtaking lack of self-awareness, SEBI claimed that “such statements affect market integrity by shaking the trust of investors in the regulatory framework.” We can’t help but wonder if protecting perpetrators of fraud while attacking those who expose it shakes investors' trust in the regulatory framework far more than our accurate and fully contextualised quoting of a source.”
• “The remaining issues highlighted by SEBI had nothing to do with the content of our research and were instead focused on technical elements of our disclaimer. For example, SEBI took issue with our disclaimer that fairly described how we were short Adani—through a deal with an investor partner who was indirectly short Adani derivatives through a non-Indian, offshore fund structure.”
• “Finally, in an apparent misreading of our report’s disclaimer, SEBI said that we were falsely “claiming objectivity” when we wrote that information in the report is “presented ‘as is,’ without warranty of any kind, whether express or implied…” Far from “claiming objectivity,” the very disclaimer language cited by SEBI was explicitly a lack of a claim—stating that we made no assurances to quality or other features of the information. In fact, we disclosed a short position in the very first line of our report and prominently again at the end in big bold letters so readers could weigh the potential for bias given that we stood to benefit from a decline in Adani shares. We then encouraged every reader to do their own research.”
• “As far as alleged “inaccuracies” with our research, that was all SEBI came up with: nothing. We encourage readers to review the notice for themselves and draw their own conclusions. Since our initial report, at least 40 independent media investigations have corroborated and emphasized our findings or have uncovered new issues of suspected fraud or malfeasance at Adani.”
• “That our research stood the test of SEBI’s investigation shouldn’t be a surprise. While many have tried to wrap our research into a narrative on “Adani vs. Hindenburg,” the reality is that the case moved beyond our initial work long ago. It has now become Adani versus a mountain of evidence, now corroborated and expounded on by dozens of independent media investigations and subsequent events that have supported our findings.” Hindenburg further linked more than 42 media reports that it said "corroborated and expounded" its initial allegations. It also clarified that its report on Adani was “never financial”.

4. On Financial Gains from Adani Report: Hindenburg denied substantial financial gains and said it was upfront about the one existing investor relationship.

• “Strategic media leaks that appear to stem from SEBI and the ED previously implied that we generated a massive financial windfall from our Adani shorts. Prior media have cited sources close to SEBI and the ED who implied that we had 12 or even 16 investor partners in our Adani work. Collectively, according to the sources, those parties generated hundreds of millions in gains. The sensational headlines and strategic ‘leaks’ suggested that we clocked a massive windfall from our report.”
• “The reality, as detailed in the show cause notice, is less dramatic. We only had one investor relationship in our Adani thesis, as is customary for our approach and as we have discussed in multiple public interviews. We have made ~$4.1 million in gross revenue through gains related to Adani shorts from that investor relationship. We made just U.S.~ $31,000 through our own short of Adani U.S. bonds held into the report. (It was a tiny position.) Net of legal and research expenses (including time, salaries/compensation, and costs for a 2-year global investigation) we may come out ahead of breakeven on our Adani short.”

“With a rise in the killing or jailing of journalists in India and a plummeting of press freedom scores in the country, we anticipated that the apparatus of the Indian government may concoct a case to attempt to scare us or others out of the market, or worse. We knew these risks before we started. Ultimately, that didn’t matter in the face of our resolve to publish in the public interest once the work met our evidentiary standards. There was never a point where the Adani thesis was financially justifiable for us. It was even less justifiable from a personal risk and safety perspective. But, to date, our research on Adani is by far the work we are most proud of.”

5. On SEBI's Role In Investigating The Adani Allegations: Hindenburg claimed SEBI has “neglected its responsibility” and only handed out a “slap on the wrists” to powerful corporates.

• “SEBI’s job as a securities regulator is to detect and stop the types of malfeasance that we exposed. In our view, SEBI has neglected its responsibility, seemingly doing more to protect those perpetrating fraud than to protect the investors being victimized by it.”
• “The incentives are clear: The gains from fraudulent activities outweigh the small risks of a potential ’slap on the wrist’ fine from regulators. And based on the hundreds of tips and leads we received following the Adani report, Adani is by no means the only lurking and ongoing issue SEBI has failed to address.”
• “The message sent to investors in India is equally loud: You have no real protection from fraud. Corporate governance in India is a myth for businessmen that can buy influence.”
• “Meanwhile, the government has once again sent the message that critics of those in power will be punished, whether by regulatory action or strategic media leaks. We expect SEBI may try to impose ‘bans’ or fines on us to clamp down on the prospect of more criticism of Indian companies. Regardless of these intimidation efforts, we will continue to speak up about malfeasance at companies anywhere across the globe if it is warranted by the evidence.”
• “At Hindenburg, we work tirelessly to root out fraudulent business practices and corporate wrongdoing. Our reports focus on evidence without taking political sides. We view India as a vibrant country with unlimited economic potential that faces issues of fraud and corruption, just as all countries do. We believe transparency is always the best remedy and are grateful that our efforts have had a meaningful impact.”