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Failure of SEBI in the Hidenburg-Adani Tussle - PART I

Updated: Feb 9

by Aditi Singh *


Financial markets should be efficient, fair, orderly, and transparent. The transparency of the financial market ensures that investors have a fair idea of the investments and the commitments they are making towards a particular enterprise. Further, the investment and share market in itself are volatile and based on public opinion. Thus, any manipulation and financial explosions are common in the case of shareholdings.

Hindenburg Research is a forensic financial research company that examines equities, credit, and derivatives. It was founded in 2017 by Nathan Anderson. It has a history of exposing corporate misconduct and betting against corporations. The Adani Group, the second-largest conglomerate in India, is led by Gautam Adani, its chairman and founder. The group’s seven most valuable publicly traded stocks—out of a total of nine—have a market value of around INR 17.8 trillion ($218 billion). It also consists of a confusing network of Adani family trusts and private entities. Gautam Adani and his family have accumulated a paper wealth of over $120 billion through their shares in the business, with over $100 billion of that coming in the last three years, mostly due to the rapid rise in the stock price.

The Hindenburg research institute, published a report on 24th January accusing the Adani Group conglomerate of fraudulent share sale, setting off an $86 billion rout in the group's domestically listed stocks and a sell-off in its bonds listed overseas. The report further brings to light the over-debtness of the Adani group. The report reveals Adani being a faux fraud for Indian investors due to its significant liquidity concerns and excessive borrowing by its different firms. The rights of the Indian investors, and the long-term manipulation by the Adani Group are questioned in the report. Just before the release of the report, Adani issued a Follow-On Public Offer (“FPO”), in sight of raising nearly Rs. 20, 000 crores. The re-selling of shares to the public through the FPO failed after the release of the report. The sudden fall of the Adani share price was coupled with the withdrawal of the historic FPO. The same, not only violated the investor trust but also raised questions on the efficiency and transparency of the working of the Adani Group.

One of the prominent allegations by the Hindenburg report is the usage of shell companies by the Adani group to cover up for lost costs. The employment of front businesses to maintain significant stakes to affect the price of the listed ones has been a major concern. The claim has been refuted by Adani, who also claims that all related-party transactions were properly declared.

Adani’s operations are not only limited to the Indian market, the same have been spread to the US and Australia. The fluctuations in India would also have a rampant effect on operations overseas. The allegations have been initiated to be investigated by Indian regulators like Securities and Exchange Board of India (“SEBI”). Though no formal investigations have begun against the conglomerate abroad, failure of Indian scrutiny will put the group under a red radar in offshore jurisdictions as well. Thus, a speedy and efficient resolution of the alleged Adani fraud is not only important for the protection of Indian investors but also to maintain its position in the global market.

This part deals with the role of SEBI in the dispute and the regulations that could have prevented the same. The second part of the series discusses the other regulatory bodies and their contributions.



The “artificial crashing” of the Indian stock market after the publication of the Hindenburg report has led to the regulatory bodies being kept on their toes. The review of the current regulatory structure, further questions the efficiency of the regulatory bodies to protect the Indian investors.


Securities and Exchange Board of India (“SEBI”) is a regulatory body established in 1992, to protect the investor interests and maintain transparency in the market. SEBI serves a two-fold purpose of laying down legislative limits for the security market and ensure strict enforcement of the limits established. The enforcement, allows SEBI to perform quasi-executive functions, i.e., , levying penalties, conducting investigations, and holding companies liable.

SEBI being a “watchdog of the financial market”, needs to keep a check on the malpractices of the market. The allegations of the Hindenburg Report, and the possibility of the same being true, question the efficiency of SEBI to have overlooked the flaws. The allegations against Adani in the report, were pre-emptive in nature. The investors could have been prevented from the alleged fraud, had SEBI disclosed the discrepancies in Adani’s book of accounts and maintained transparency in the market. The share-selling probe was investigated and given a clean chit by the regulator in 2019. The clean chit by SEBI and subsequent allegations against the conglomerate, suggest a lack of efficient working of the regulatory body.

SEBI had already investigated the Adani Group, in 2007, for market manipulation and enhanced price rigging, the punishments of the same, were merely reduced to fines, not affecting the functioning of the enterprise in any manner. The prolonged investigation by SEBI into offshore accounts of the Adani group without any substantial decision on the same further highlights the delayed response and laid-back attitude of the regulatory body. The 2009, investigation by SEBI, under Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Markets, merely led to bare minimum fines against the Adani group. Having ignored the seriousness of default and the alleged involvement of the enterprise in frauds should have made SEBI more vigilant towards the activities of the Adani group.

Failure of SEBI can also be seen under the hood, that when Adani Group failed to disclose the promoter details as necessitated by promoter shareholding disclosures, the regulatory body, failed to take any action and let it pass. The suspicious trading patterns, with Mauritius and Cayman Island entities, which are prohibited to day trade in India, further puts SEBI in a bad light. Just because the company was flourishing well and the output was multi-fold of the group, the frauds cannot be subdued.

The rigorous change in the auditing panel in the Adani Group with auditors that lack substantial public appearance, questions the ignorance of SEBI towards an independent auditing system. Had Suo- motto cognizance has been taken by the regulatory authority after seeing the fluctuations, the current havoc could have been prevented to a huge extent.

SEBI’s inefficiency is not a one-sided argument. The publication of the Hindenburg report, also poses questions on the rights of SEBI, to cancel its findings and hold the research institute accountable for its invasion of the Indian market, illegally. The conglomerate alleges that the publication of the report is against SEBI Research Analyst Regulations, 2014 (“R.A. Regulations”) and SEBI Prohibition of Unfair and Fraudulent (“PFTUP”) Regulations, 2003. On the other hand, the institute scrutinizes SEBI for overlooking the offshore shells and funds tied to the Adani Group that would subject the Adani companies to delisting, where Indian securities regulator SEBI’s rules are enforced.

Publishing any information against an Indian conglomerate can be done by a research institute, by obtaining prior permission from SEBI. Failure of the Hindenburg research institute, is in clear violation of R.A. Regulations. This questions the intention of the report makers, to bring to light a scam or was just an action to manipulate the market and gain profits. Section 12A of the SEBI Act, 1992, forbids the use of manipulative and misleading techniques when issuing, buying, or selling securities that are listed or are being considered for listing on any recognised stock exchange in India.

Market manipulation refers to unjustified intervention with the normal dynamics of supply and demand that compromises the fairness and effectiveness of the market. The Court in N Narayan v. SEBI, determined that the purpose of the SEBI was to prevent market manipulation Moreover, in the case of Pooja Menghani v. SEBI, the Court expanded the meaning of “unfair” to include any practice that compromises moral principles and sincere commercial dealing.. Unless the allegations in the report are proved, the research institute can be held liable under SEBI Act, 1992 for manipulating investor sentiment and affecting the market. The fulfilment of the second limb of the function, and standing up to people’s expectations is an important duty on the shoulders of SEBI. The same was mis-performed by the body in the current case.

SEBI’s failure is evident through its knowledge and yet delayed or no action against the Adani Group. The regulatory body could have tackled the situation and held the group liable for its failure to comply with the disclosure norms.

The contribution of other regulatory bodies along with a suggestive preventive mechanism in the other part of the series, provides a comprehensive analysis of the situation.

*Aditi Singh is a forth year student at National Law University Visakhapatnam at the time of publication of this blog.

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