SEBI pressured brokers to close short positions in Adani stocks: Hindenburg Research

Hindenburg also questioned why Sebi failed to name Kotak Bank and its boss Uday Kotak in its observations as the private lender as well as the brokerage firm created and oversaw an offshore fund, used by an unnamed investor, to profit from a crash in Adani stocks.
SEBI (File Photo | Reuters)

NEW DELHI: India’s capital market regulator Sebi pressured brokers behind the scenes to close short positions in Adani stocks under the threat of expensive and perpetual investigations, said US-based short seller Hindenburg Research on Tuesday. 

“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,” said the research firm in an update to its initial report that came out in January 2023.

Hindenburg also questioned why Sebi failed to name Kotak Bank and its boss Uday Kotak in its observations as the private lender as well as the brokerage firm created and oversaw an offshore fund, used by an unnamed investor, to profit from a crash in Adani stocks. 

“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”, said Hindenburg. KMIL refers to Kotak Mahindra Investments Ltd, an asset management company.

It added, “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.” 

In a clarification, KMIL said Hindenburg has never been a client of the firm, "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 Fund was never aware that Hindenburg was a partner of any of its investors. 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."

Hindenburg informed that it made $4.1 million in gross revenue through "gains related to Adani shorts from that investor relationship" and just $31,000 through its short position of the conglomerate's US bonds. It, however, did not name the investor. 

Adani-Hindenburg verdict: Chronology of events

Hindenburg termed the SEBI show cause notice as "nonsense" and "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."

"After 1.5 years Of investigation, SEBI identified zero factual inaccuracies with our Adani research. Instead, the regulator took issue with things like our use of the word 'scandal' when describing multiple prior instances of Adani promoters being charged with fraud by Indian regulators, and our quoting of an individual that alleged SEBI is corrupt and works 'hand in glove' with conglomerates like Adani to help it skirt regulations," it said.

The US firm said the show cause notice does resolve some questions: "Did Hindenburg work with dozens of firms to short Adani, making hundreds of millions of dollars? No - We had one investor partner, and net of costs we may barely come out above breakeven on our Adani short."

"Our work on Adani was never justifiable from a financial or personal safety perspective, but it is by far the work we are most proud of," it said.

"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," it said, adding that its January 2023 report had "provided evidence of a vast network of offshore shell entities controlled by (group chairman) 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," it said.

On the SEBI notice, it said, "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 US-based research firm with zero Indian entities, employees, consultants or operations."

The regulator, it said, claimed that the disclaimers in the report were misleading because the firm was "indirectly participating in the Indian securities market."

"This wasn't a mystery, virtually everyone on earth knew we were short Adani because we prominently and repeatedly disclosed it," it said.

The January 2023 report by Hindenburg led to a rout in Adani shares and at one point saw more than $150 billion being wiped out from the market value of the 10 listed Adani companies. It has alleged stock manipulation and accounting fraud at the Adani group, calling it “the largest con in corporate history.”

Adani Group repeatedly denied the Hindenburg report, calling it malicious and baseless. The conglomerate has recovered the bulk of the stock losses since. The Supreme Court in January this year ruled that the Adani Group won’t face any further investigations beyond SEBI’s current scrutiny, which spanned a probe into tax haven use and stock manipulation.

(With inputs from PTI)

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