SEBI issues show cause notice to Hindenburg, All you need to know

SEBI Notice: Hindenburg Research, the US-based firm whose report last year triggered a $150 billion decline in Adani Group stocks, has responded to a 'show cause notice' from the Securities and Exchange Board of India (SEBI). The firm describes the notice as "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."

The 46-page notice from SEBI outlines the background of Hindenburg's report and details its relationship with an investor who expressed a short position in Adani. Hindenburg argues that much of the notice seems designed to imply that its legal and disclosed investment stance was something secretive or insidious. The firm emphasises that it is a US-based entity with no Indian entities, employees, consultants, or operations, and criticises SEBI's attempt to claim jurisdiction over it.

Hindenburg’s Reaction

Hindenburg points out that SEBI's arguments are circular, stating, "The regulator claimed that the disclaimers in Hindenburg's report were misleading because it was 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."

The research firm also alleges that SEBI's notice conspicuously fails to name Kotak Bank, which it says created and oversaw the offshore fund structure used by its investor partner to bet against Adani. Instead, SEBI referred to the K-India Opportunities fund, masking Kotak's involvement with the acronym "KMIL." Hindenburg speculates that SEBI's omission might be intended to protect powerful Indian businessmen from scrutiny.
Uday Kotak, founder of Kotak Bank, personally led SEBI’s 2017 Committee on Corporate Governance. Hindenburg suspects SEBI's lack of mention of Kotak or any other Kotak board member is indicative of a broader issue of regulatory protectionism.

Hindenburg's 106-page report, published last year, included 720 citations and alleged that the Adani Group engaged in a brazen stock manipulation and accounting fraud scheme over decades. The fallout from the report was significant, leading to a massive rout in Adani's stock market value.

‘SEBI’s Selective Focus’

Hindenburg alleges SEBI's selective focus aims to shield influential Indian entities from regulatory scrutiny. After a thorough investigation lasting 1.5 years, SEBI's findings did not identify factual inaccuracies in Hindenburg's research on Adani. Instead, the regulator criticised subjective aspects of the report, such as the use of the term "scandal" to describe past legal issues involving Adani and quoting sources alleging regulatory favouritism towards conglomerates.
Critics argue that SEBI's emphasis on semantic issues rather than substantive findings undermines its credibility in addressing financial misconduct. Hindenburg contends that such allegations are typical in regulatory investigations but lacks concrete evidence to support claims of deliberate misleading.

The ongoing dispute highlights broader concerns over regulatory jurisdiction in global financial markets and the implications for foreign firms engaging in critical analysis of domestic companies. As SEBI and Hindenburg navigate legal complexities, the case raises pivotal questions about transparency, regulatory overreach, and investor protection in international finance.

Why is Kotak named in the controversy?

While responding to the allegations by the country’s securities and commodity market regulator, Hindenburg has accused SEBI of vaguely mentioning Kotak Mahindra Investments Limited as KMIL and not clearly highlighting its role in the dealings. Hindenburg in response to the notice said, “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.” Hindenburg shared that Kotak Mahindra Investments Limited “created and oversaw the offshore fund structure” used by Hindenburg’s investor partner to bet against Adani. The short seller alleged SEBI of masking Kotak’s name under the acronym ‘KMIL.’ Instead, it simply named the K-India Opportunities fund and masked the “Kotak” name with the acronym “KMIL”

Hindenburg, for the first time in its responses, named Uday Kotak, the founder and former CEO of the Kotak Mahindra Bank, suggesting that SEBI is trying to underplay the role of its former Corporate Governance Chief in the Adani short-selling bets to ‘protect yet another powerful Indian businessman’.

“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,” Hindenburg said.