Indian regulators allege Hindenburg's Adani report 'indulged in unfair trade practices'

India's market regulator has accused Hindenburg Research of engaging in unfair trade practices in its report on Indian billionaire Gautam Adani, alleging that the short seller collaborated with a New York hedge fund for its bet. 

The Securities and Exchange Board of India (Sebi) stated in a "show cause" notice dated June 26 that Hindenburg Research "deliberately sensationalized and distorted certain facts." A show-cause order often precedes formal legal action, reports Financial Times. 

Hindenburg, which published the notice on its website, called the allegations "an attempt to silence and intimidate those who expose corruption and fraud perpetrated by the most powerful individuals in India." Following a show-cause notice, Sebi can impose financial penalties and bar participation in its capital markets. Sebi gave Hindenburg 21 days to respond to the allegations.

The Hindenburg report, released in January 2023, targeted Adani's extensive ports, power, and infrastructure empire, derailing the group's $2.5 billion share sale plans and wiping $140 billion off the group's market value. Adani has vehemently denied the allegations.

Sebi's notice named US hedge fund Kingdon Capital Management as a silent partner in Hindenburg's short bet against Adani Enterprises. Kingdon, an established New York-based hedge fund founded in 1983 and owned by financier Mark Kingdon, entered 2024 with about $640 million in assets under management, according to a March securities filing.

Hindenburg Research, founded by Nathan Anderson, has become a formidable presence in financial markets. Anderson stated that he worked with partners, including other hedge funds, to finance his trades due to his firm's small size. Activist short sellers often sell research to third parties who, in exchange, provide cash to execute their trades.

In its 46-page notice, Sebi detailed an alleged relationship between Hindenburg and Kingdon that began in autumn 2022, months before Hindenburg published a report alleging extensive impropriety at Adani Enterprises, which the conglomerate denied.

Hindenburg revealed that it made about $4.1 million in gross revenue through the Adani shorts scrutinised by Sebi, and $31,000 through its own "tiny" short of the group's US bonds. After expenses related to its two-year investigation into Adani, "we may come out ahead of break-even on our Adani short," Hindenburg stated.

The publication of the report in 2023 sent shockwaves through the global financial community and put financial pressure on the empire of Adani, one of India's richest men. 

The report accused the conglomerate of moving billions of dollars in and out of Adani-controlled entities, often without disclosure. It also detailed a network of offshore funds that allegedly "helped Adani evade minimum shareholder listing rules."

Hindenburg stated that it bet against Adani using various financial instruments to short one of India's largest companies, a notoriously difficult jurisdiction for offshore investors to access. Adani's stocks have since recovered most of their losses.

Kingdon and Hindenburg did not immediately respond to messages seeking comment. Hindenburg criticized Sebi on Monday for not focusing its investigation on the Adani conglomerate and claimed Sebi was seeking to assert jurisdiction over a US-based investor. Hindenburg also alleged that Kotak Mahindra Bank, one of India's largest banks and brokerage groups, "created and oversaw the offshore fund structure used by our investor partner to bet against Adani."

Sebi, Kotak, and Adani did not immediately respond to requests for comment.