Capital Markets: Challenges and Developments

Why has SEBI accused Hindenburg of breaking Indian law?  


From UPSC perspective, the following things are important :

Prelims level: SEBI Function and Power

Mains level: Challenges related to the Capital Market

Why in the news? 

Hindenburg Research received a SEBI show cause notice for short-selling Adani Enterprises Ltd stock before and after their report accusing Adani of fraud.

What is the Hindenburg Report on Adani?

  • On January 24, 2023, the New York-based Hindenburg Research accused the Adani Group of “brazen stock manipulation and accounting fraud scheme over the course of decades.”
  • The report led to a significant drop in the shares of Adani companies and the calling off of Adani Enterprises Ltd’s Rs 20,000-crore follow-on Public Offer (FPO). Adani Group denied all allegations, claiming the report was a “calculated attack on India.”

What is SEBI’s show cause notice about?

  • Hindenburg received a show-cause notice from SEBI on June 27, 2024.SEBI alleged that Hindenburg colluded with certain entities to use non-public information to short-sell Adani Enterprises Ltd (AEL) stock before and after the release of its report, making profits.
  • The notice named Hindenburg, its founder Nathan Anderson, investor Mark Kingdon, and related entities, accusing them of sharing the report draft and building short positions in AEL futures.

How has Hindenburg responded to the show cause notice?

  • Hindenburg dismissed the notice as an attempt to silence those exposing corruption. They stated their investment stance was legal and disclosed, and criticized SEBI for targeting them instead of investigating the Adani Group’s alleged malpractices.
  • Accusations: Hindenburg accused SEBI of pressuring brokers to close short positions in Adani stocks to protect the stock prices.

Where does Kotak come into this picture?

  • Involvement of Kotak: SEBI’s notice did not name Kotak Bank, which Hindenburg claims created the offshore fund structure used for shorting Adani stocks.
  • Response: Kotak Mahindra Bank stated that Hindenburg has never been a client and that their KYC procedures were followed with regard to clients, with investments made by Kingdon as a principal.

How much profit did Hindenburg earn by short selling Adani stocks?

  • Revenue: Hindenburg earned approximately $4.1 million in gross revenue through gains related to Adani shorts from its investor relationship.
  • Own Short Position: Hindenburg made about $31,000 from their short of Adani US bonds.After legal and research expenses, Hindenburg indicated they might only slightly come out ahead of break-even on their Adani short.

Way forward: 

  • Conduct Investigation: SEBI should initiate an independent, comprehensive investigation into the allegations against both Adani Group and Hindenburg Research. This investigation should be conducted by a neutral third party to ensure impartiality and transparency.
  • Policy Review: SEBI could review and possibly update its regulations on short-selling and market manipulation to prevent similar incidents in the future. This could include stricter disclosure requirements for short sellers and enhanced monitoring of market activities.

Mains PYQ: 

Q The product diversification of financial institutions and insurance companies, resulting in overlapping of products and services strengthens the case for the merger of the two regulatory agencies, namely SEBI and IRDA. Justify.(UPSC IAS/2013)

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