Hindenburg Research: What does the recent revelation say?

A new set of documents have been released by the Hindenburg Research based in New York. The documents supported its claim that the present investigation into insider trading and the various stock market violations by the Adani Group conducted by the Securities and Exchange Board of India is compromised.

The latest release brings to light the emails and publicly accessible records demonstrating the stakes held by Madhabi Puri Buch, the SEBI Chairman, and her husband Dhaval Buch in the entities related to the Adani Group via obscure offshore investment funds. This is used to allege a conflict of interest that helped the Adani Group in "siphoning funds."

The short seller seeks to build a connection between the alleged use of two offshore funds, the investments by the couple, and the multiple professional roles to accuse Ms. Buch of favoritism towards the Adani Group. Both Adani Group and Ms. Buch have denied the allegations.

Understanding the short selling

Short selling involves making a profit from a decrease in a stock's price. It can serve a wide array of purposes. One of them is correcting the demand-supply imbalances in the stocks. Promotion of price efficiency is another one. Short selling has also been used for manipulation. This practice is called "bear raid" by the U.S. Securities and Exchange Commission (SEC). This gives rise to concerns relating to the credibility and intent of the short sellers.

In practice, short selling involves the sale of a borrowed stock in anticipation of a decrease in the price, and then, buying it again once the price has dropped.

The short seller had bet against Nikola Corp, the electric truck maker, in the year 2020. It questioned the functionality of the technology used by Nikola Corp. Trevor Milton, the founder of Nikola was convicted of fraud by a United States jury for deceiving the investors about the technology used by the company.

Accusations against the SEBI chief

The allegations against the SEBI chief stress upon the purported "hidden stakes" of Buch in offshore funds situated in Bermuda and Mauritius. The Hindenburg throws light on concerns about two important issues: a possible collusion and a conflict of interest.

According to the investigations by the Organized Crime and Corruption Reporting Project (OCCRP), the short seller indicates that Gautam Adani's brother Vinod Adani invested in the "Global Dynamic Opportunities Fund" based in Bermuda, which then funneled capital into the IPE Plus Fund 1, based in Mauritius.

Another investigation indicated that the parent fund of the Global Opportunities Fund was made to use by two Ambani associates, Chang Chung-Ling from Taiwan and Nasser Ali Shaban Ahli from UAE to acquire large positions in the stocks of the conglomerate, leading to allegations of stock manipulation. Moreover, as per the Hindenburg report, the Chief Investment Officer and founder of the IPE Plus Fund was Anil Ahuja. He also served as the director at Adani Enterprises for a total of nine years until 2017.

 The Buchs opened an account with the IPE Plus Fund 1 in the year 2015. The short seller indicates that the alleged reluctance of SEBI to indulge in "meaningful action" in the currently going investigation might be because of the complicity of the chairperson in using the same funds as Mr. Adani.

Other allegations relate to the professional engagements. Ms. Buch has established a consulting firm Agora Partners in India and Singapore respectively in 2013. She became a whole-time member with SEBI in April 2017 prior to being elevated as the chairperson in March 2022. SEBI's Code on Conflict of Interests for Members of Board suggests that whole-time members can either engage in any professional activity that involves getting any payment or fees, nor can the whole-time members hold any office of profit.

However, accusations by the short seller claim that she has transferred only the 100 percent stake in the Singapore unit after her appointment to the senior most position. This too was done only in 2022.

Hindenburg explains through a post on X that “Buch remained a 100% shareholder of Agora Partners Singapore until March 16th, 2022, per Singaporean records, owning it during her entire time as a SEBI Whole Time Member. She only transferred her shares into her husband’s name 2 weeks after her appointment as SEBI Chairperson.”

Other allegations are related to her husband, Dhaval Buch. The short seller said that Dhaval Buch was appointed as the senior advisor at Blackstone, an investment management firm, notwithstanding a lack of experience in either fund management nor real estate.

The report accused Ms. Buch, while working at SEBI and later leading it, of proposing, accusing, and facilitating huge alterations to the rules for real-estate investment trusts (REITs). According to Hindenburg, these changes helped Blackstone to gain an advantage.

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