Abstract: Hindenburg Research, known for its forensic financial analysis, released a report on January 24, 2023, accusing the Adani Group of fraudulent practices. The report, titled “Adani Group: How the World’s 3rd Richest Man Is Pulling the Largest Con in Corporate History,” alleged issues like accounting irregularities, bad actors in management, and undisclosed regulatory matters. Hindenburg revealed that it held short positions in Adani Group through U.S.-traded bonds and non-Indian derivatives. The report led to a significant drop in Adani’s market capitalization, wiping out over $100 billion in value. While Hindenburg profited from these short positions, legal and regulatory questions have arisen about the firm’s offshore short-selling practices and the implications for Indian markets. The Securities and Exchange Board of India (SEBI) has frameworks regulating short selling, but there is still ambiguity regarding how profits from offshore trades flow to investors. The report led to widespread market panic, and concerns remain about the potential ripple effects on domestic and foreign investments tied to Adani. The market losses were particularly severe for Adani’s promoters, foreign institutional investors, and the general public.
Hindenburg Report on Adani Enterprises and its aftermath: A legal analysis
Hindenburg Founded by Nate Anderson, Hindenburg Research specializes in forensic financial research.
While they use fundamental analysis to aid our investment decision-making, they believe the most impactful research results from uncovering hard-to-find information from atypical sources. In particular it often looks for situations where companies may have any combination of:
- Accounting irregularities
- Bad actors in management or key service provider roles
- Undisclosed related-party transactions
- Illegal/unethical business or financial reporting practices
- Undisclosed regulatory, product, or financial issues
They have been into forensic financial researching since 2014 and the various research outputs include the following:
1. 2014 –Whistle-blower report to the SEC relating to RD Legal, a hedge fund that was later charged by the commission for allegedly making material misstatements to its investors.
2. 2015 – Submitted a whistle-blower report to the SEC related to TCA Global, a Florida-based hedge fund.
3. 2016-a whistle-blower report to the SEC related to Statim Holdings, an Atlanta-based hedge fund.
4. 2016-submitted a whistle-blower report relating to suspected fraud at Platinum Partners, a $1.4 billion hedge fund.
5. 2022: In mid-2022, following Elon Musk’s agreement to buy Twitter, we announced a short position, betting that Musk, a notoriously impulsive individual, would either try to renegotiate or walk away from the deal.
6. Four days later, Musk attempted to walk away from the deal, sending Twitter’s stock lower. We covered our short and later went long, believing that Musk’s arguments for backing out were unlikely to prevail in court. Musk later closed the deal at the originally agreed upon price, resulting in investment gains in both directions.
These are taken from “About us “page from the Hindenburg website https://hindenburgresearch.com/about-us/
On January 24, 2023, the research firm published a report titled,” Adani Group: How the World’s 3rd Richest Man Is Pulling the Largest Con in Corporate History
The Report starts with the initial disclosure as quoted below:
Initial Disclosure:
1. After extensive research, we have taken a short position in Adani Group Companies through U.S.-traded bonds and non-Indian-traded derivative instruments.
2. This report relates solely to the valuation of securities traded outside of India. This report does not constitute a recommendation on securities.
3. This report represents our opinion and investigative commentary, and we encourage every reader to do their own due diligence.
4. Please see our full disclaimer at the bottom of the report
Disclosure in Hindenburg Report: We Are Short Adani Group through U.S.-Traded Bonds and Non-Indian-Traded Derivative Instruments
Legal Disclaimer:
1. We hold short positions in Adani Group Companies through U.S.-traded bonds and non- Indian-traded derivatives, along with other non-Indian-traded reference securities.
2. This report relates solely to the valuation of securities traded outside of India. This report does not constitute a recommendation on securities.
3. This report represents our opinion and investigative commentary and we encourage every reader to do their own due diligence.
4. Use of Hindenburg Research’s research is at your own risk. In no event should Hindenburg Research or any affiliated party be liable for any direct or indirect trading losses caused by any information in this report.
5. You further agree to do your own research and due diligence, consult your own financial, legal, and tax advisors before making any investment decision with respect to transacting in any securities covered herein.
6. You should assume that as of the publication date of any short-biased report or letter, Hindenburg Research (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our clients and/or investors has a short position in all stocks or bonds (and/or derivatives of the stock) covered herein, and therefore stands to realize significant gains in the event that the price of any security covered herein declines.
7. Following publication of any report or letter, we intend to continue transacting in the securities covered herein, and we may be long, short, or neutral at any time hereafter regardless of our initial conclusions, or opinions.
8. This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction.
9. Hindenburg Research is not registered as an investment advisor in the United States or have similar registration in any other jurisdiction.
10. To the best of our ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer.
11. However, such information is presented “as is,” without warranty of any kind – whether express or implied. Hindenburg Research makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use.
12. All expressions of opinion are subject to change without notice, and Hindenburg Research does not undertake to update or supplement this report or any of the information contained herein.
Market impact on Adani Enterprises Stock in BSE post release of Report:
| Date | 02-01-2023 | 23-01-2023 | 24-01-2023 | 25-01-2023 | 26-01-2023 | 31-01-2023 | 30-01-2024 | 31-07-2024 |
| BSE Stock price | 3840.7 | 3434.5 | 3442.75 | 3389.85 | 2762.15 | 2975 | 3091.55 | 3169.1 |
The Market Cap Loss:
| Date | Price in BSE |
| 25-01-2023 | 3,389.85 |
| 26-01-2023 | 2,762.15 |
| Loss /Equity | 627.70 |
| No of equity: as on 31 March 2023 | 1,13,99,83,967.94 |
| Loss in Mkt Cap Rs Cr | 71,556.79 |
Shareholding
Summary
Promoter SH is 75%; FII hold 12%. Our worry could be only about DII 6% and General Public 7.5%.
Loss distribution:
| SH % | Loss Rs Cr | |
| Promoters | 74.72% | 53,467.24 |
| FII | 11.73% | 8,393.61 |
| DII | 6.02% | 4,307.72 |
| Public | 7.53% | 5,388.23 |
| Total | 1.00 | 71,556.79 |
Hindenburg’s report had a dramatic impact on the market, wiping out more than $100 billion of the Adani Group’s market value.
How much did Hindenburg make from the Adani report?
Hindenburg Research made over $4 million from its short-selling position on Adani stocks, according to Bloomberg, which reported earnings figures disclosed in a statement by the firm.
The Legal disclaimer from Hindenburg states in Point 1 & 2 as follows:
1. “We hold short positions in Adani Group Companies through U.S.-traded bonds and non- Indian-traded derivatives, along with other non-Indian-traded reference securities.
2. This report relates solely to the valuation of securities traded outside of India. This report does not constitute a recommendation on securities. “
The loss has occurred in Market cap of Adani group Companies’ shares in India which are the underlying assets. But holding short position in non-Indian traded reference securities, The Research firm claims to play in the US market. This would suggest that the loss in Adani group Market cap in India could not have directly benefitted the Research firm but indirectly through their short position in Adani Group Companies through US traded bonds, non- Indian-traded derivatives, along with other non-Indian-traded reference securities.
Let us understand what these off shore based securities in which Hindenburg research hold short positions:
Is there a way we can get hold of the complete list of: from any regulatory or company source?
1. S.-traded bonds
a. This one could be obtained from the Indian Company’s BS itself, if I am not wrong and
2. non-Indian-traded derivatives
a. The derivative trades where Hindenburg might have placed its bet on, would SEC be able to provide data?
3. along with other Non-Indian traded reference securities
a. This one, as reported in an article in Reuters and also reported in Business Standard, we should identify the entities that had registered with SEBI that create P Notes.
b. We should check if the entity has disclosed its Short Positions to SEBI. If Hindenburg had set up the entity, we can check for registration with SEBI.
c. If they were just investors in any of those entities, we should check how the profits of the entities could have flown into its investors (since short positions can be taken in India only by those who have registered with SEBI) and if profits from short selling happened, it will accrue only to the entity that is registered.
d. But the investors might get a dividend from out of the profits made by the P Notes entity. How much got distributed by the entity to Hindenburg is what we should check from SEBI records.
SEBI’s circular permitting short selling:
Vide Circular no SEBI/HO/MRD/MRD-PoD-3/P/CIR/2024/1 dated January 05, 2024, the Framework for Short Selling is communicated to all stakeholders. The circular refers to SEBI’s Master Circular No. SEBI/HO/MRD2/PoD-2/CIR/P/2023/171 dated October 16, 2023 vide Paragraph 10 of Chapter 1, ‘Annexure 3’, and the broad framework for short selling is specified which re is produced below:
“Annexure 3: Broad Framework for Short Selling
1. “Short selling” shall be defined as selling a stock which the seller does not own at the time of trade.
2. All classes of investors, viz., retail and institutional investors, shall be permitted to short sell.
3. Naked short selling shall not be permitted in the Indian securities market and accordingly, all investors would be required to mandatorily honour their obligation of delivering the securities at the time of settlement.
4. No institutional investor shall be allowed to do day trading i.e., square-off their transactions intra-day. In other words, all transactions would be grossed for institutional investors at the custodians’ level and the institutions would be required to fulfil their obligations on a gross basis. The custodians, however, would continue to settle their deliveries on a net basis with the stock exchanges. 5. The stock exchanges shall frame necessary uniform deterrent provisions and take appropriate action against the brokers for failure to deliver securities at the time of settlement which shall act as a sufficient deterrent against failure to deliver.
5. A scheme for Securities Lending and Borrowing (SLB) shall be put in place to provide the necessary impetus to short sell. The introduction of a full-fledged securities lending and borrowing scheme shall be simultaneous with the introduction of short selling by institutional investors.
6. The securities traded in F&O segment shall be eligible for short selling. SEBI may review the list of stocks that are eligible for short selling transactions from time to time.
7. The institutional investors shall disclose upfront at the time of placement of order whether the transaction is a short sale. However, retail investors would be permitted to make a similar disclosure by the end of the trading hours on the transaction day.
8. The brokers shall be mandated to collect the details on scrip-wise short sell positions, collate the data and upload it to the stock exchanges before the commencement of trading on the following trading day.
9. The stock exchanges shall then consolidate such information and disseminate the same on their websites for the information of the public on a weekly basis. The frequency of such disclosure may be reviewed from time to time with the approval of SEBI.”
Some of the major requirements from the above framework is that
1. The institutional investors shall disclose upfront at the time of placement of order whether the transaction is a short sale. However, retail investors would be permitted to make a similar disclosure by the end of the trading hours on the transaction day.
2. The brokers shall be mandated to collect the details on scrip-wise short sell positions, collate the data and upload it to the stock exchanges before the commencement of trading on the following trading day.
3. The stock exchanges shall then consolidate such information and disseminate the same on their websites for the information of the public on a weekly basis. The frequency of such disclosure may be reviewed from time to time with the approval of SEBI.”
Thus if Hindenburg had done short selling of Adani scripts in India, then we should check if they did through Institutional Investors (FII or DII) or as retail Investors. In the first one, the investor must have u front disclosed their short positions while in the latter case, at the end of the trading day.
But Hindenburg states that their short positions were in Adani Group Companies through U.S.-traded bonds and non- Indian-traded derivatives, along with other non-Indian-traded reference securities.
If that be true, then SEBI’s framework on short selling will not apply to Hindenburg research.
Let us check the legal position in the US on short selling:
The Securities and Exchange Commission adopted new Rule 13f-2 and related Form SHO and an amendment to the national market system plan (“NMS Plan”) governing the consolidated audit trail (“CAT”) to provide greater transparency of short sale-related data.
- Under Rule 13f-2, institutional investment managers (“Managers”) that meet or exceed certain prescribed reporting thresholds will report on Form SHO certain short position and short activity data for equity securities. The Commission will thereafter aggregate and publish certain data collected from Form SHO.
- Under the amendment to the NMS Plan governing CAT (“CAT NMS Plan”), CAT reporting firms will indicate whether an order is a short sale effected by a market maker in connection with bona fide market making (“BFMM”) activities for which the BFMM exception in Rule 203(b)(2)(iii) of Regulation SHO is claimed.
Source: https://www.sec.gov/files/34-98738-fact-sheet.pdf
This appears to be in line with SEBI’s broad framework on short selling or SEBI has adopted the SEC rule 13f-2 as Broad Framework on short selling.
The above is explained in a more descriptive manner by an article published in Reuters on October, 14, 2023, the following. Quoted from the publication:
“The new rules require institutional investors to report their gross short positions to the SEC monthly and certain “net” short activity for individual dates on which trades settle. The SEC plans to then publish aggregate stock-specific data on a delayed basis.
Such data makes regulators and the public “better positioned to prevent or respond to … destabilizing events,” said Stephen Hall of Better Markets, which advocates for tougher financial rules.
FINRA already publishes short interest reports collected from broker-dealers, but the new rule will apply to institutional investment managers too, offering a fuller picture of market-wide short bets. The new data will also include a daily net activity on each settlement, data not currently available with FINRA or the exchanges.
But hedged funds represented by the Managed Funds Association said on Friday the rules could expose investors’ strategies. “Investment advisers will face more risk when selling short, which will harm investors, market participants, and market efficiency,” said it’s CEO Bryan Corbett.”
The intention and wordings are more or less similar to the Broad Framework on short selling issued by the SEBI.
I quote from https://www.schwab.com/learn/story/ins-and-outs-short-selling
“Proceed with caution
At its most basic, short selling involves rooting against individual companies or the market, and some investors may be opposed to that on principle.
However, if you have a firm conviction that a stock price is heading lower, then shorting can be a way to act on that instinct—so long as you’re aware of the risks.”
To quote from https://www.reuters.com/markets/us/us-action-short-sellers-likely-next-few-months-doj-official-2023-05-24/
“ACTIVIST SHORTS
In addition to GameStop, the rise of activist short-sellers who publish negative research on companies in the hopes of depressing the share price has also drawn regulatory scrutiny.
Since at least 2021, the Justice Department and the SEC have also been investigating potential manipulation by short sellers and hedge funds around the publication of negative research reports.
SEC officials said the new rules, which the commission agreed upon in a 3-2 vote, support the agency’s efforts to police the practice.”
In January 2024, SEBI has submitted before the Hon’ble SC that investigations in 22 out of 24 matters relating to the Conglomerate. SC had held in Writ Petition (C) No. 162 of 2023 Vishal Tiwari …Petitioner Versus Union of India & Ors. …Respondents in Para G. Conclusion 67 (b) ,”In a nutshell, the conclusions reached in this judgement are summarized below: No valid grounds have been raised for this Court to direct SEBI to revoke its amendments to the FPI Regulations and the LODR Regulations which were made in exercise of its delegated legislative power. The procedure followed in arriving at the current shape of the regulations does not suffer from irregularity or illegality. The FPI Regulations and LODR Regulations have been tightened by the amendments in question;”.
Let us check SECURITIES AND EXCHANGE BOARD OF INDIA (FOREIGN PORTFOLIO INVESTORS) REGULATIONS, 2019 notified on Mumbai, the 23rd September, 2019 Regulation 4 sub regulation (b) (ii) short selling transactions in accordance with the framework specified by the Board;
From the above it is clear that wrt short selling the provisions of SEBI (FOREIGN PORTFOLIO INVESTORS) REGULATIONS, 2019 shall not apply but the Framework on Short Selling issued by SEBI through the SEBI’s Master Circular No. SEBI/HO/MRD2/PoD-2/CIR/P/2023/171 dated October 16, 2023 vide Paragraph 10 of Chapter 1, ‘Annexure 3’.
The framework expects the Institutional Investor to make upfront disclosure at the time of entering the transaction about all his short positions and by the retail investor before the end of the transaction day about his short selling positions.
From the above discussions, the following points emerge:
1. Short selling is not illegal either in the US or in India but subject to certain compliances
2. Naked short selling is not permitted which commits the short seller to stock delivery on the appointed day
3. Even the US it recognizes the fact that making profit through short selling is just a business activity if we already know that share prices are going to fall in the future
4. But if the share fall is an orchestrated one by publishing adverse reports about the company whose stocks the publisher has already taken a short position on, then it shall demand judicial and regulatory enquiry- in the US by the Justice department and in India by the SEBI
5. We need to check if the Hindenburg Research which has disclosed in the research report that it had taken short positions on Adani linked US listed bonds and derivatives, had simultaneously made the disclosures to their gross short positions to the SEC monthly and certain “net” short activity for individual dates on which trades settle.
6. By monthly it is understood that the disclosure to SEC must precede the research report and not follow the report
7. Similarly in India too under Chapter 1 Para 10 Annexure 3, under the Broad Frame work for short selling, the Institutional investors will make upfront disclosure at the time of placement of order and by the Individual investors by the end of the trading hours on the transaction day.
8. The action points are now on SEBI to
a. Check for any Short selling disclosure lapses in India on Adani group shares by either institutional Investors or Individual Investors and
b. Ask SEC to provide similar information to it based on bilateral agreements.
9. This would provide transparency and if there had been any lapses then the Indian Government shall put pressure on SEC to punish the Research firm and de-gorge the profits it made post publication of its Research Report.
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Disclaimer: The article titled “Hindenburg Report on Adani Enterprises and its Aftermath: A Legal Analysis” published on https://taxguru.in/ is for informational and educational purposes only. The content is based on publicly available information and the author’s interpretation of the events surrounding the Hindenburg Report on Adani Enterprises. It does not constitute legal, financial, or investment advice, and should not be construed as such. The opinions expressed are solely those of the author and do not reflect the views of Taxguru.in. Readers are encouraged to perform their own due diligence and consult with a qualified professional before making any investment or legal decisions. Taxguru.in does not assume any responsibility or liability for the accuracy, completeness, or timeliness of the information presented. Additionally, Taxguru.in does not endorse or take any stance on the findings or conclusions of Hindenburg Research, and any references to Hindenburg’s past actions or reports are solely for context and understanding. The above write up is an attempt to understand the whole episode with particular reference to the SEBI/SEC framework/rules and does not constitute any opinion on anyone/Institution. Use of this article is at the reader’s own risk, and Taxguru.in shall not be liable for any losses or damages arising from its use.
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