Swatting with a Cane

It is a veritable sucker punch that holds the swaying power to get Hindenburg Research to all but totter on its feet and head for the mat, goose-bumps and all. Sure, it has been long in the coming, but finally come good it has – the Securities & Exchange Board of India’s (SEBI) response to Hindenburg Research’s allegations against India’s Adani Group is scathing and telling. That is just as well, for it also holds the potential to not just shore up investor confidence in the Indian market, it also serves the larger purpose of laying the ground for a decisive and stern counter-offensive.

Such a counter-offensive and ‘return attack’ by SEBI was imperative, given the long-drawn, ‘on now and off again’ nature of Hindenburg Research’s frequent and significant charges against an Indian Corporate entity. More important, with the Hon’ble Supreme Court, India’s tallest legal entity, giving a clean chit to Adani and instructing SEBI to probe the possibility of market entities involved in short-selling, the spotlight has shifted. The message is clear – there is little cause to look for irregularities by a Company, and a burning necessity to see whether nefarious elements are cooking up a non-issue to play truant in the market.

The facts of this matter throw up the development in its stark entirety. Subsequent to the directions of the apex court, SEBI has issued a show-cause notice to Hindenburg Research, an organization known to have frequent exposure in stock markets. Also, Hindenburg the ‘research agency’ now appears quite rattled as the exposé masterminded by its own report continues to rage. SEBI’s investigation has also hinted that market players and Hindenburg together conspired to take short positions in Adani shares, with the research agency allegedly taking a profit cut from shorting, resulting in millions of dollars in profits.

SEBI’s show-cause notice also shows that Hindenburg’s report was loaded with conjecture and misrepresentations, purportedly with the understated intent of maximizing profits from short positions. Further, instead of addressing and cooperating with SEBI’s investigation – which is based on documents and proof obtained from courts in the United States and the SEC – Hindenburg Research has started attacking SEBI itself, calling India’s market watchdog “biased”. The last fact alone is a matter of concern. That is because while it claims extensive investigation, Hindenburg relies heavily on news articles and press notes. The icing on the cake is that Hindenburg now insists that it did not profit from short-selling in Adani stocks. Ironically, to underline this ‘fact’, Hindenburg is using its ‘own’ self-reported numbers on its ‘own’ website as its ‘own’ proof – this list of Hindenburg’s ‘owns’ throws up SEBI’s very real and “own” spectre of foul play.

In its report, Hindenburg seemingly presented inferences based on misleading statements, sensationalizing and draping a negative cloak around what could have been straightforward facts. Even to an outsider, the approach appears reckless, one that falls well short of the diligence that is expected from any forensic financial research entity.

Look at this next number of make your own assumptions – in spite of Hindenburg claiming only “small profits” from shorting Adani, SEBI’s investigation reveals that the research body made US $9.2 million by taking short positions in exchange-traded funds (ETFs) and options on the MSCI India Index, and trading in bonds of Adani Electricity Mumbai Limited, AGEL, and APSEZ.

SEBI also says it has found that Hindenburg Research misrepresented the judgment of the Hon’ble Supreme Court, using the same to allege Government corruption and bribery without proof. This is a serious matter, especially as it casts aspersions on India’s market watchdog in a reckless manner, relying solely on anonymous sources and the statement of a broker who has been banned from the securities market.

Another twist in the tale is the mention of prominent financial investor Mark Kingdon, the head of Kingdon Capital Management based in New York, a major player in the global world of finance and one that manages investment funds. Having made headlines for his investment strategies, Kingdon has now found his way into the Hindenburg-Adani issue. The matter revolves around reports that Kingdon used non-public information to build short positions in Adani stock. This has seen SEBI take up the issue and serve show-cause notices to Kingdon’s investment firms for allegedly “colluding to profit from insider information”.

The odds stacked against Hindenburg are getting higher and the matter more seething, one that can have severe consequences. As market watchdog, SEBI can debar persons seen to be associated with the securities market, even if they are located outside India, especially if the underlying shares are traded in India and their actions impact Indian investors. SEBI can also proceed ‘ex parte’ if Hindenburg Research does not join the proceedings as the show-cause notice has been duly served. About the only scaffolding required by SEBI is one that allows it to enforce actions against an entity like Hindenburg which has no physical presence in India.

Market-watchers point to this lack of physical absence – added to Hindenburg’s position as a research organization that also takes live action and makes investment calls in global markets – as a cause for scrutiny. That raises big, burning questions: “How can a research body profit in the same exchange market where it is filing reference reports against market players? How can it file negative reports on any organization and then laugh its way to the bank as that same report impacts the pricing of that same traded instrument?”

These are pertinent questions. Anywhere else in the world, questions such as this would have invited punitive damages, blacklisting and automatic legal enquiries and proceedings. How Hindenburg fares on that angle in India is something we need to keep an eye out for.

The writer is an independent market research analyst and senior columnist. Views expressed are personal