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The story so far: New York-based Hindenburg Research has released a new set of documents to substantiate its accusation that the ongoing investigation into insider trading and other stock market violations by the Adani Group by India’s financial regulator — the Securities and Exchange Board of India (SEBI) — is compromised. In its latest tranche, Hindenburg has included emails and publicly available records of stakes held by SEBI Chairman Madhabi Puri Buch and her husband Dhaval Buch in Adani Group-related entities through little-known offshore investment funds to allege a conflict of interest that aided the Adani Group to “syphon monies”. The short seller attempts to establish a correlation between the alleged use of two offshore funds, the couple’s investments and varied professional engagements to accuse Ms. Buch of being biased toward the Adani Group. Both Ms. Buch and the Adani Group have denied the charge.
Also Read: Something big soon on India, says Hindenburg Research
What is short selling about?
Short selling entails profiting from a fall in the prices of a scrip. Although short selling can serve many purposes, such as mitigating demand-supply imbalances in scrips and ensuring price efficiency, it has also been used as a means of manipulation — or what the U.S Securities and Exchange Commission (SEC) has described as a “bear raid”. Thus, prompting concerns about intent and credibility. As a practice, it entails selling a borrowed scrip in anticipation of a downward price movement and buying it back when the lower price level is realised. Let us say, anticipating a downward movement, an individual sells 10 shares at ₹100 apiece. The total sale value is ₹1,000. The price of the share decreases to ₹85 apiece and they opt to buy the quantity back. This time it will cost them ₹850 — a direct profit of ₹150.
Also Read: Hindenburg allegations: Adani group stocks tumble
The short seller in discussion had shorted electric truck maker Nikola Corp in 2020 placing concerns about their functionality. In October 2022, the Nikola’s founder Trevor Milton was convicted by a U.S. jury of fraud for lying to investors about the technology.
What is the SEBI chief accused of?
At the centre of the allegations are the Buchs’ alleged “hidden stakes” in certain offshore funds in Bermuda and Mauritius, two tax havens, and their professional engagements during and before Ms. Buch’s tenure at SEBI. Hindenburg asserts concern on two fronts, a conflict of interest and an ensuing collusion.
About personal investments: gathering from investigations by the Organized Crime and Corruption Reporting Project (OCCRP), the short seller points to Vinod Adani, brother of Adani Group Chairman Gautam Adani, who invested in the Bermuda-based ‘Global Dynamic Opportunities Fund’ (GDOF), which then invested in the Mauritius-based IPE Plus Fund 1. A separate investigation by the Financial Times said that the parent fund of GDOF, that is, the Global Opportunities Fund (GOF) were used by two Adani associates, Nasser Ali Shaban Ahli from UAE and Chang Chung-Ling from Taiwan, to amass and acquire large positions in scrips of the conglomerate, amounting to stock manipulation. Additionally, as per the Hindenburg report, the founder and Chief Investment Officer (CIO) of the IPE Plus Fund was Anil Ahuja, director at Adani Enterprises for nine years until 2017.
The Buchs opened an account with the Mauritius-based fund in 2015. The short seller places that SEBI’s alleged unwillingness to take “meaningful action” (in the ongoing investigation) could stem from the chairperson’s “complicity” in using the exact same funds as Mr. Adani.
The other set of accusations relate to their professional engagements. In 2013, Ms. Buch had set up a consulting firm Agora Partners in India and Singapore respectively. Important to note that she became a whole-time member with SEBI in April 2017 before being elevated as the chairperson in March 2022. SEBI’s Code on Conflict of Interests for Members of Board stipulates that whole-time members can neither hold any office of profit nor engage in any professional activity that involves receiving any fees or payment. However, the short seller accuses her of transferring only the 100% stake in the Singapore unit (not the Indian one) after her appointment to the top post, and that too only in 2022. In an X post responding to the Buchs statement Hindenburg says: “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.”
Also Read: Hindenburg Research vs SEBI’s Madhabi Buch: How the row unfolded
The last set of accusations concern her husband, Dhaval Buch. The short seller stated that Mr. Buch notwithstanding a lack of prior experience in either real estate nor fund management, was appointed senior advisor at the investment management firm Blackstone in 2019. With Ms. Buch employed at SEBI and later at the helm of affairs, the report accuses, that SEBI “proposed, approved and facilitated” major changes to real-estate investment trusts’ (REITs) policies and rules on listing and other stock market related activities. Thus, enabling Blackstone — “one of the largest REIT sponsors in India” — to benefit from the changes, Hindenburg alleged.
What has been the recent exchange about their investments?
In a detailed statement, the Buchs said the investments referred to in Hindenburg’s report were made two years before Ms. Buch joined SEBI. While addressing concerns about collusion, the Buchs stated the investment was undertaken considering Mr. Ahuja’s “strong investing career” and that he was also Mr. Buch’s “childhood friend” and a batchmate at IIT Delhi. Re-emphasising their argument, they pointed to redeeming their investment in the fund when Mr. Ahuja stepped down as its CIO in 2018. The joint statement further affirms that at no point the fund invested in any bond, equity or derivative of the Adani conglomerate.
However, Hindenburg in its response on ‘X’, said the response only confirmed the investment in the offshore fund. Mr. Ahuja also served as a director at the Adani Group until 2017, something the conglomerate has also mentioned in their response to the short-seller’s allegations. Hindenburg emphasised the Buchs’ investments in the offshore fund was first made in 2015, when Mr. Ahuja was still a director at the Adani Group. The short seller also pointed to Ms. Buch’s communications in 2017 and 2018. In 2017, Mr. Buch had sought that the ownership be transferred entirely to him. However, in 2018, during her tenure as a whole-time SEBI member, Ms. Buch sought to redeem the units in the fund — prompting concerns about continued engagement.
What about the consulting firm?
The statement from the Buchs also stated that two consulting companies in discussion had become “immediately dormant on her appointment with SEBI”. This was also disclosed to SEBI. It further informs that Dhaval Buch in 2019, started his own consultancy practice with “prominent clients in the Indian industry” enabled by his deep expertise in “supply chain” management.
In their ‘X’ post however, Hindenburg accused the SEBI chief of still holding a 99% stake in the Indian consulting entity, and not her husband. The entity, it said, was active and generated revenues to the tune of $3,12,000 between financial years 2022-2024, when Ms. Buch was the SEBI chief. About the Singapore unit, the short seller said Ms. Buch only transferred the stake in 2022, after becoming the chairperson and held it during her entire tenure as a whole-time member.
Hindenburg further alluded to more conflict of interest concerns based on the firm’s clientele (if they are regulated by SEBI) and its revenue. The short seller expresses its inability to trace the same (about the Singapore unit) citing the local legislation exempting the firm from making disclosures. However, it deems the information as necessary to assess the “probity of the chairperson’s external business”.
What of the Blackstone appointment?
About Mr. Buch’s appointment at Blackstone, the couple stated that the appointment was on account of Mr. Buch’s expertise in supply chain management. It furthers states that at no point was Dhaval Buch associated with the real-estate side of Blackstone.
In fact, it also informs about Blackstone Group being immediately added to the incumbent SEBI chief’s recusal list. The markets regulator in its standalone statement also described Hindenburg’s accusations as “inappropriate”. The statement other than explaining the mandatory exhaustive consultation process, also pointed to having underscored the potential of REITs, SM REITs, InvITs and Municipal Bonds among other asset classes for democratisation of markets, financialisaton of household savings and for capital formation through markets.
Where do we stand now?
The Supreme Court in an order this January had, among other things, sought SEBI to also probe whether the losses suffered by Indian investors because of Hindenburg’s erstwhile report involved any “infraction of the law”. SEBI issued a show cause notice to the short seller this June. “It is unfortunate that instead of replying to the show cause notice, they have chosen to attack the credibility of SEBI and attempt character assassination of the Chairperson,” SEBI said. In an order dated January 3, the SC had also asked SEBI to complete the investigation into the pending two allegations of the twenty-four overall ones within three months. It informed on Sunday about having completed one of them and the other being “close to completion”.
In fact, the apex court in the same order had refused to transfer the investigation from SEBI to the Special Investigative Team (SIT) or the Central Bureau of Investigation (CBI). But it noted that it would exercise its powers in “extraordinary circumstances” if the competent authority displays a “glaring, wilful and deliberate” inaction in carrying out the investigation.
