A CRITICAL EXAMINATION OF ALLEGATIONS, RESPONSES, AND LEGAL IMPLICATIONS

Introduction  

The SEBI-Hindenburg controversy is centered around an investigation launched by the Securities and Exchange Board of India (SEBI) in response to allegations made by Hindenburg Research, a U.S.-based short-selling firm. SEBI, as India’s primary market regulator, found itself under intense scrutiny as it sought to verify the legitimacy of Hindenburg’s accusations and investigate whether any regulatory lapses had occurred. This controversy has brought to the forefront critical issues regarding corporate governance, market transparency, and the vital role that regulators play in maintaining investor confidence.

Background

On January 24, 2023, Hindenburg Research released a report following a two-year investigation into the Adani Group, a prominent Indian conglomerate with interests ranging from ports to edible oils.

The report accused the Adani Group of engaging in stock manipulation, accounting fraud, and various financial irregularities, with public shareholding levels being dangerously close to the minimum regulatory requirements.

The release of this report triggered a sharp decline in the market value of Adani Group companies, sparking serious concerns about the state of regulatory oversight in India.

Hindenburg Allegations on Adani group

One of the many allegations in the Hindenburg report suggests that there is considerable opacity in certain public shareholders of Adani companies, particularly funds based in Mauritius.

The report suggests that these funds, while shown as representing public shareholding, are owned and controlled by the Adani group and, therefore, ought to be classified as promoter shareholders as opposed to public shareholders. They suggest that by using such funds, which have the entirety of their assets invested in Adani companies, Adani promoters can manipulate share prices as well as retain a controlling stake more than 75% in their companies.

Response of Adani group

In its response on January 29, 2023, the Adani Group firmly denied any links to the offshore funds mentioned in the Hindenburg report, asserting that, as publicly listed entities, they have no control over who buys, sells, or holds their shares on the open market. The group dismissed the report as baseless, labeling the allegations as “unsubstantiated speculations.”

Furthermore, Adani characterized the report as more than just an attack on a specific company, but a deliberate attempt to undermine India’s independence, the integrity of its institutions, and the country’s growth and ambitions.

Hindenburg Allegations on SEBI and Madhabi Buch (chairperson of SEBI)

On August 10, 2024, Hindenburg Research released a report that reignited the controversy surrounding the Adani Group and SEBI, India’s securities regulator. The report reiterated Hindenburg’s earlier claims, made 18 months prior, that the Adani Group was engaged in “the largest con in corporate history,” involving undisclosed related-party transactions, offshore shell entities based in Mauritius, and stock manipulation. Despite extensive evidence and over 40 independent media investigations supporting these allegations, SEBI has not taken public action against the Adani Group. Instead, on June 27, 2024, SEBI issued a ‘show cause’ notice to Hindenburg, focusing on what it deemed insufficient disclosure of the firm’s short position.

The report goes further to accuse SEBI Chairperson Madhabi Buch and her husband, Dhaval Buch, of having financial interests in the same offshore funds allegedly used by the Adani Group for money laundering and stock manipulation.

According to whistleblower documents, Vinod Adani, the brother of Adani Group Chairman Gautam Adani, had deposited a significant sum into an offshore fund in which the Buchs had stakes. These funds, registered in high-risk jurisdictions like Bermuda and Mauritius, were reportedly involved in financial irregularities, including over-invoicing power equipment.

Hindenburg’s report raises serious concerns about a potential conflict of interest, given Buch’s role as SEBI Chairperson, responsible for overseeing India’s financial markets. It questions SEBI’s hesitance to act against the Adani Group, especially considering that regulatory changes during Buch’s tenure have reportedly benefited entities like Blackstone, where her husband serves as a Senior Advisor.

Response of SEBI

On August 11, 2024, the Securities and Exchange Board of India (SEBI) issued a press release in response to the allegations made in Hindenburg Research’s report dated August 10, 2024. SEBI clarified that the accusations against the Adani Group have been rigorously investigated, with 23 out of 24 investigations concluded by March 2024.

During the investigation, SEBI issued over 100 summons and sent around 1,100 letters and emails to gather information. The regulator also engaged with domestic and international regulators and agencies through more than 100 communications to aid the investigation.

SEBI also addressed Hindenburg’s criticism regarding the show cause notice it issued to the research firm on June 27, 2024. SEBI emphasized that the notice was issued in full compliance with legal procedures, and the reasons for its issuance were clearly outlined in the document, which Hindenburg has made publicly available on its website.

Additionally, SEBI responded to claims that its amendments to the SEBI (REIT) Regulations, 2014 had disproportionately benefited a large multinational financial conglomerate. SEBI explained that the regulations had been amended over time through a transparent process, and any changes were made following industry consultation and in line with the broader goal of enhancing market efficiency.

Response of Madhabi Buch, the Chairperson of SEBI, and her husband Dhaval Buch

In response to the allegations made by Hindenburg on August 10, 2024, Madhabi and Dhaval Buch released a comprehensive statement to address concerns about their personal investments and professional roles. Both Madhabi, with a career in banking and financial services, and Dhaval, who served in senior roles at Hindustan Unilever and Unilever globally, have long and distinguished corporate careers.

The investment mentioned in the Hindenburg report was made in 2015 while they were private citizens living in Singapore, two years before Madhabi joined SEBI. Dhaval’s appointment as a Senior Advisor to Blackstone in 2019 was based on his expertise in supply chain management, unrelated to real estate, and this role was publicly known before Madhabi became SEBI Chairperson.

The couple firmly rejected Hindenburg’s allegations, describing them as malicious and motivated, suggesting they were linked to the show cause notice SEBI had issued to Hindenburg for various violations.

Ongoing Legal Proceedings- Petition filed by Vishal Tiwari

In a recent legal development, an application has been filed in the Supreme Court urging SEBI to expedite its pending investigations into the Adani Group, in line with the timeline set out in the Court’s January 2024 judgment. The applicant, Vishal Tiwari, contends that the use of the word “preferably” in the judgment should not undermine the three-month deadline originally suggested by the Court for completing the investigations.

Tiwari’s application also references the latest report from Hindenburg Research, which alleges conflicts of interest involving SEBI Chairperson Madhabi Buch, creating what he describes as an “atmosphere of doubt.” With this he argues and makes it imperative for SEBI to conclude its investigations promptly.

Conclusion

The ongoing conflict between SEBI and Hindenburg Research underscores critical issues surrounding corporate governance, legal accountability, and regulatory oversight within India’s financial markets. As both parties respond to the allegations, the outcome of this dispute could have lasting implications for investor confidence and the country’s regulatory frameworks. The resolution of this case will likely shape future regulatory practices and set precedents for how similar disputes are handled in India’s financial landscape.