Adani Group building on the outskirts of Ahmedabad, India. In 2023, the conglomerate was hit by claims from a U.S. short seller that it engaged in acounting fraud. © Reuters
BENGALURU — U.S. short seller Hindenburg Research has hit back at claims by India’s market regulator that it engaged in improper trading and “deliberately sensationalized and distorted certain facts” when it bet against Adani Group last year.
In a post to its website on Monday, Hindenburg responded to a previously undisclosed show-cause notice it received last week from the Securities and Exchange Board of India (SEBI) over its explosive January 2023 report, which alleged “brazen stock market manipulation and accounting fraud” at the Indian ports-to-power conglomerate.
The claims triggered a wild selloff that shaved off about $150 billion from Adani’s market value and forced the conglomerate to shelve a $2.5-billion share sale.
The company, controlled by one of India’s richest men Gautam Adani, has refuted the allegations and its shares have recouped most of their losses on the back of a broader market rally.
If proven, the regulator’s allegations could lead to monetary penalties and the payback of any illegal gains.
The Indian agency’s notice, often a precursor to formal legal action, and Hindenburg’s response has shed more light on the entities involved in shorting Adani shares and the profits made off the fraud allegations, which raised concerns over corporate governance at Indian companies.
The new information also revealed more about how the trade was carried out, which had baffled some observers as Indian securities rules make it difficult for foreign investors to bet against companies listed in the country.
The SEBI notice made public by Hindenburg claimed that the short seller had shared a draft of its report on Adani Group with U.S.-based hedge fund Kingdon Capital days before it was made public — with an agreement that Hindenburg would get one quarter of the profits, which amounted to $22 million, according to SEBI estimates.
SEBI did not respond to an email seeking comment, but an agency official confirmed the authenticity of the notice.
Hindenburg said claims it distorted facts about Adani’s accounting were “nonsense, concocted to serve a pre-ordained purpose … to silence and intimidate those who expose corruption and fraud perpetrated by the most powerful individuals in India.”
The regulator “neglected its responsibility, seemingly doing more to protect those perpetrating fraud than to protect investors victimized by it,” the U.S. company added.
For the first time, Hindenburg disclosed that it had “only one investor relationship” regarding the Adani report, but did not identify anyone. It also said that the firm made $4.1 million in gross revenues from the “Adani shorts from that investor relationship” and about $31,000 “through our own short of Adani U.S. bonds.”
“Net of legal and research expenses (including time, salaries and compensation, and costs for a two-year global investigation) we may come out ahead of breakeven on our Adani short,” Hindenburg claimed.
The trade of Adani securities was made by K-India Opportunities Fund, a foreign portfolio investor operated by a subsidiary of one of India’s largest banks, Kotak Mahindra. The fund set up short positions on Adani in the days leading up to the release of the Hindenburg report.
In an emailed statement, Kotak Mahindra said that Hindenburg was neither a client of the firm nor an investor in the K-India Opportunities Fund. It also denied knowledge of Hindenburg being a partner of any of its investors.
“We have cooperated with regulators in relation to our operations and continue to do so,” it said.
source : asia.nikkei