Hindenburg Report 2.0: The Complexities of Allegations Against the Adani Group and SEBI

Hindenburg Research, founded in 2017 by Nate Anderson, is a U.S.-based forensic financial research firm that specializes in exposing corporate fraud. Hindenburg faces criticism for its aggressive short-selling tactics, which some argue manipulate stock prices and harm investors. However, supporters believe that firms like Hindenburg are essential for maintaining market integrity by exposing fraudulent activities.

In recent times, the Adani Group has been the focus of multiple controversies, especially regarding financial practices. One of the most notable controversies began last year when Hindenburg Research accused the Adani Group of violating Indian market regulations, specifically the rule that public companies cannot own more than 75% of their own shares. Hindenburg alleged that Adani exceeded this limit, causing a public outcry. The Securities and Exchange Board of India (SEBI) was tasked with investigating these claims. After a detailed investigation, SEBI dismissed the allegations, stating that there was no evidence of wrongdoing.

The matter took a new turn when Hindenburg released a follow-up report, this time accusing SEBI Chief Madhavi Puri Buch of not conducting the investigation transparently. This marked the start of what is now being called the "Hindenburg 2.0 saga."

The Accusations: A Complex Web of Fund Structures:

The new Hindenburg report highlights a complex financial structure allegedly involving the Adani Group, SEBI, and IIFL, an Indian wealth management firm. The report claims that this intricate structure was used to channel illegitimate funds into Adani Group companies.

Understanding the Convoluted Fund Structure:

A convoluted fund structure is a multi-tiered investment system designed to create multiple layers of financial transactions. At the top is a master fund, which invests in several subsidiary funds, each with its own unique investment strategy. Such complex structures are often used to obscure the flow of funds, making it difficult to trace the origins and destinations of investments. These structures can be used for various purposes, including tax minimization, regulatory arbitrage, and in some cases, illegal activities such as money laundering.

The Alleged Scheme: How the Funds Were Moved : 

According to Hindenburg, the Adani Group allegedly employed a three-layered fund structure to rotate funds. The report outlines the structure as follows:

1. Global Opportunities Fund: The primary or parent fund.
2. Global Dynamic Opportunities Fund: A sub-fund based in Bermuda, a known tax haven.
3. IP Plus Fund One: Another sub-fund, located in Mauritius, another tax haven.

Hindenburg alleges that Adani imported power equipment and paid more than the fair market price for it. The supplier, Asset Trade and Investment Private Limited, is reportedly owned by Vinod Adani, Gautam Adani’s brother. This company then invested millions into the Global Dynamic Opportunities Fund and moved substantial funds into the Global Opportunities Fund. These funds subsequently invested in the Indian stock market via IP Plus Fund One, creating a circular flow of funds back into Adani stocks.

Hindenburg report and Adani share price:

Adani Enterprises and Adani Ports & Special Economic Zone, the group’s two most valuable companies and components of the benchmark Nifty 50 index, closed down by 1.1 per cent and 2 per cent, respectively. Adani Ports & SEZ was the biggest laggard among Nifty constituents.

Both benchmark equity indices – Sensex and Nifty 50 – faced pressure from the latest controversy in the Adani-Hindenburg Research saga, even as the impact was limited.  The Sensex dropped as much as 480 points, or 0.6 per cent, during intraday trade, before closing 57 points, or 0.07 per cent, lower at 79,649. The Nifty 50 ended the session at 24,347, down 21 points, or 0.08 per cent.

 

SEBI Chief, IIFL, and Alleged Conflicts of Interest

Hindenburg’s report also implicates SEBI Chief Madhabi Puri Buch, alleging that she and her husband, Dhaval Buch, had investments in the Global Dynamic Opportunities Fund. This fund is linked to the Adani Group through investments by Asset Trade and Investment Private Limited. According to Hindenburg, IIFL played a role in setting up these complex fund structures for Adani, further complicating the matter.

The report claims that these personal investments create a conflict of interest for Madhabi Buch in overseeing investigations related to Adani. Hindenburg also states that despite transferring her shares to her husband, Madhabi Buch continued to use her personal email to communicate with the fund, suggesting ongoing involvement.

The Response from SEBI Chief and Her Husband

Madhabi Puri Buch has responded to these allegations, clarifying that the investments were made in 2015 when both she and her husband were private citizens living in Singapore. She emphasized that these were personal investments made through a friend, Anil Ahuja, who managed the fund. Furthermore, she noted that she had withdrawn all her investments by 2018, well before her appointment as SEBI chairperson in 2022.

Addressing the claims about her husband’s appointment at Blackstone, Madhabi Puri Buch clarified that Dhaval Buch's role was based on his qualifications, including his experience and background. She highlighted that Blackstone was added to the recusal list as soon as she became SEBI chairperson to avoid any conflicts of interest.

The Adani Group’s Stance

In response to the renewed allegations, the Adani Group has dismissed Hindenburg’s claims, labeling them as "malicious, mischievous, and manipulative." The Adani Group has expressed confidence in their financial practices and has shown little concern over the latest allegations, viewing them as attempts to mislead the public for personal gain.

Response by Government:

However, the BJP came out strongly against Hindenburg Research and rejected the demand for a JPC probe. The BJP accused the grand old party of weakening the Indian economy and destroying investment in the country. BJP leader and former Union minister Ravi Shankar Prasad reiterated the party's line that the short-selling firm's allegations and the opposition's criticism of the market regulator are part of a wider conspiracy.

Conclusion: A Web of Allegations and Rebuttals

The Hindenburg 2.0 saga underscores the complexities of financial regulation and corporate governance in large conglomerates. The use of convoluted fund structures raises important questions about transparency and accountability. While Hindenburg's allegations are serious, the responses from SEBI and Adani suggest a different perspective. How these issues will be resolved remains to be seen, but the outcome will likely influence future corporate governance and regulatory practices in India, highlighting the need for clear and transparent oversight mechanisms.

References

• https://x.com/ANI/status/1822594009623130493?t=wpF_mZ8RqytkpyPdkq-3Bw&s=19https://youtu.be/tykAc024_8o?si=bjWJPBzx2_sklgsv
• https://www.thehindu.com/business/markets/hindenburg-report-echo-adani-group-stocks-tumble/article68515095.ece
• https://timesofindia.indiatimes.com/business/india-business/adani-group-stocks-fall-up-to-7-on-hindenburg-report-investors-lose-rs-53000-crore/articleshow/112457655.cms

 Blog written by Vikash Chaurasiya and Pranali Nankar.