THE BJP SAYS IT is a conspiracy to destabilize India’s financial markets. Congress wants a joint investigation by a parliamentary committee. Regardless of which side you’re on, Hindenburg Research’s recent report has embarrassed the Securities and Exchange Board of India and its chairman, Madhabi Puri Buch, over conflicts of interest. It also raises broader compliance issues that the regulator has been grappling with for years.
Founded by Nathan Anderson and based in New York, Hindenburg specializes in forensic financial research. Specifically, it looks for situations where companies might have accounting irregularities, bad actors in management, undisclosed transactions, unethical business practices, undisclosed regulatory issues, and the like. And it also aims to profit from its research through short selling, a trading strategy in which stock traders take a position that a certain stock price will fall. Often, its report itself drives the stock price down, as happened in January 2023, when its report on Adani Group, accusing it of accounting fraud, stock price manipulation, and money laundering, wiped around $150 billion off the group’s market capitalization. Hindenburg made $4.1 million in profit by short selling Adani securities on behalf of his client.
In its latest report, Hindenburg claims that SEBI failed to act against Adani despite sufficient evidence. It alleges that Buch and her husband Dhaval invested in the same obscure offshore funds used by Vinod, brother of Adani Chairman Gautam Adani. It also alleges that while Dhaval was a senior adviser at American investment firm Blackstone and Buch was a SEBI official, two Blackstone-sponsored real estate investment trusts (REITs) received approval to go public in India and that after she took over as chairman, SEBI implemented several REIT regulations that benefited Blackstone.
Another allegation was that Buch had founded two consulting firms, one in Singapore and one in India, and held 99 percent of the shares in the Indian firm. That firm had revenue of $261,000 from consulting services in fiscal year 2022, which was 4.4 times her stated salary as a full-time member of SEBI.
The Buchs responded to the allegation point by point. For example, they said they had invested in the fund (IPE Plus Fund 1) when they were working in Singapore because the CIO Anil Ahuja was a childhood friend of Dhaval. The investments were made in 2015 and repaid in 2018 when Ahuja left. She said the consultancy firms she had founded became inactive when she was appointed to SEBI and after the equity stake in the Singapore unit was transferred to her husband, it was disclosed to both SEBI and the Singapore authorities.
JN Gupta, former managing director of SEBI, said it was impossible for the Buchs to have known who the other investors in a fund were. “Would you ask for the details of all the investors in a mutual fund before investing? These expectations are irrational,” he said.
According to Shriram Subramanian, founder of proxy advisory firm InGovern, the Hindenburg allegations against Buch were “amateurish” and appeared “vindictive and without proper analysis.” “She has not benefited from investing in the IPE Plus Fund, her holdings in the Indian and Singaporean advisory firms are fairly straightforward and SEBI officials, including the whole-time members and the chairman, are required to disclose their personal investments and commercial interests internally on an ongoing basis,” he said.
SEBI also clarified that it had provided all relevant information on securities holdings and withdrew where necessary. According to Gupta, the current disclosure norms for SEBI officials are strict; they have to disclose all assets and investments. And they cannot invest in shares of listed companies.
Nevertheless, the whole episode has raised numerous concerns.
“This can be seen as a wake-up call for SEBI and other regulators,” Subramanian said. “The chairmen and top officials should disclose their assets and investments and invest in blind trusts.” Blind trusts are usually set up where an individual needs to avoid a conflict of interest between their work and their personal investments. In countries like Canada and the US, this is mostly the case for government officials. In a blind trust, the individual transfers all their assets to a trustee, who is then responsible for all decisions regarding the assets.
Columnist and author Debashis Basu said it was not a question of corporate governance. “It is about the probity of the regulator, which is placing huge disclosure and compliance burdens on market participants,” he said. “SEBI already has board members from the finance ministry and RBI who can ask some questions if required,” he said.
An independent investigation seems to be the best way to protect the reputation of SEBI and its leadership. “If the allegations are substantiated, it could require a review of the control mechanisms and personal accountability within SEBI. If they are found to be unfounded, it is crucial to understand the motives behind such allegations and the potential impact on the market. In any case, it underscores the need for robust systems to prevent and address conflicts of interest and ensure that the market functions transparently and fairly,” said Akshat Khetan, founder of AU Corporate Advisory and Legal Services.
While the new Hindenburg report has put the spotlight on the regulator and its chief, the question arises: what is the status of the Adani investigation?
The Supreme Court had in January observed that SEBI had completed 22 of 24 investigations related to the Adani Group. According to SEBI, another one was completed in March and the last remaining investigation is nearing completion. It said it had examined around 300 documents, issued more than 100 summons and sent around 1,100 emails seeking information.
SEBI had sent Hindenburg a notice of appeal in June for violations of securities laws. The regulator said the proceedings were still ongoing.
The incident has also led to a political spat. The government has so far shown no inclination to give in to the opposition’s demand for a JPC inquiry. The opposition is likely to keep up the pressure. The stock market reaction to the new Hindenburg report was much more muted than the first, perhaps because the shock value had worn off. But the end of the Hindenburg v Adani and SEBI saga is certainly not yet here.
