Hindenburg Report: Did the SC Give a Clean Chit to Adani Group?

Hindenburg Report and the Supreme Court: Was the Adani Group Exonerated?

On August 10, 2024, Hindenburg Research released a report titled “Whistleblower Documents Reveal SEBI’s Chairperson Had Stake In Obscure Offshore Entities Used In Adani Money Syphoning Scandal.” The report levelled serious allegations against Madhabi Buch, the current Chairperson of the Securities and Exchange Board of India (SEBI), and her husband, Dhaval Buch. According to Hindenburg, the Buchs held stakes in offshore funds linked to a broader scheme involving the Adani Group’s alleged financial misconduct.

In response, the Adani Group swiftly issued a press statement dismissing the claims as recycled accusations that had already been investigated and dismissed by the Supreme Court of India in March 2023. This statement fueled a wave of media narratives suggesting that the Adani Group had received a clean chit from the country’s highest court. But did the Supreme Court actually absolve the Adani Group of all wrongdoing? What did the Court’s order truly entail, and why is it critical to understand the gravity of its findings now? These questions are crucial as we unravel the layers of this complex case. To understand the Supreme Court’s stance, it is essential first to revisit the initial report by Hindenburg Research that set the stage for the ongoing scrutiny of the Adani Group. 

What Did the 2023 Hindenburg Report Say?

On January 24, 2023, Hindenburg Research published a report titled "Adani Group: How The World's 3rd Richest Man Is Pulling The Largest Con In Corporate History." In this report, Hindenburg accused the Adani Group of engaging in a ‘brazen stock manipulation and accounting fraud scheme over the course of decades’. 

The report highlighted that Gautam Adani’s elder brother, Vinod Adani, through a network of close associates, managed a complex web of offshore shell companies. Hindenburg identified 38 shell companies in Mauritius linked to Vinod Adani or his associates. Additionally, similar entities were found in Cyprus, the UAE, Singapore, and various Caribbean Islands.

According to the report, many of these companies had no clear signs of actual business operations—no reported employees, no independent addresses, phone numbers, or significant online presence. Despite this, the report states that these shell companies allegedly moved billions of dollars into Indian Adani companies, both publicly listed and private, without properly disclosing the nature of these deals as related-party transactions.

Hindenburg claimed that these shell companies served multiple purposes, including stock parking and manipulation, as well as funnelling money into Adani’s private companies and then onto the balance sheets of its publicly listed entities. This practice, according to Hindenburg, helped the Adani Group maintain the appearance of financial stability and solvency.

In India, publicly listed companies are required to disclose all holdings by promoters and ensure that at least 25% of the shares are held by non-promoters to prevent manipulation and insider trading. Hindenburg's research suggested that Adani’s listed companies are on the brink of the delisting threshold due to high promoter ownership.

The report also noted that many of the largest non-promoter holders of Adani stock were actually offshore shells and funds connected to the Adani Group. This could potentially lead to the delisting of Adani companies if the Securities and Exchange Board of India (SEBI) were to enforce these rules. Hindenburg also mentioned that Right to Information (RTI) requests they filed with SEBI confirmed that these offshore funds were under investigation, a process that had been ongoing for over a year-and-a-half.

The report further alleged that evidence of stock manipulation in Adani’s listed companies is not new. SEBI had previously investigated and prosecuted over 70 entities and individuals, including Adani promoters, for manipulating Adani Enterprises’ stock. In 2007, SEBI ruled that Adani promoters had helped notorious stock market manipulator Ketan Parekh in manipulating Adani’s stock. Although Adani entities were initially banned, these penalties were later reduced to fines, which Hindenburg viewed as government leniency towards the Group.

According to the 2007 investigation, 14 private Adani entities transferred shares to Ketan Parekh’s entities, who then manipulated the market. The Adani Group responded by claiming they dealt with Ketan Parekh to finance their operations at Mundra port, implying that the stock manipulation was a legitimate form of financing.

In addition to stock parking, the Hindenburg report found several instances of offshore shell companies sending money through private Adani companies to public Adani companies. These funds were allegedly used to manipulate Adani’s financial reports, bolster reported profits or cash flows, and enhance the creditworthiness of listed entities, or were moved within the Adani Group wherever capital was needed.

The funds then seem to be used to engineer Adani’s accounting (whether by bolstering its reported profit or cash flows), cushioning its capital balances in order to make listed entities appear more creditworthy, or simply moved back out to other parts of the Adani empire where capital is needed, said the report.

Did the Supreme Court Give a Clean Chit to Adani Group?

In February 2023, a batch of writ petitions was filed before the Supreme Court under Article 32 of the Constitution. These petitions raised concerns about the sharp decline in investor wealth and the volatility in the stock market caused by the drop in share prices of the Adani Group companies following Hindenburg's report in January 2023.

The petitioners argued that the Adani Group had violated Rule 19A of the Securities Contracts (Regulation) Rules, 1957, by allegedly controlling more than 75% of the shares of publicly listed Adani companies, thereby manipulating market prices. They demanded a court-monitored investigation by a Special Investigation Team or the Central Bureau of Investigation (CBI) into the allegations of fraud and the role played by top officials of public sector banks and lending institutions.

When the matter was heard by the Supreme Court on March 2, 2023, the Court acknowledged the significant loss of investor wealth in the aftermath of Hindenburg's report and emphasised the need to protect Indian investors from such market volatility. 

Recognising the gravity of the situation, the apex court noted that SEBI was already investigating the Adani Group and directed SEBI to continue its investigation. The Court specifically instructed SEBI to examine whether there was a violation of Rule 19A, any failure to disclose related party transactions, and any manipulation of stock prices.

Additionally, the Supreme Court set a deadline for SEBI to complete its investigation within two months and report back with its findings. To further ensure a comprehensive assessment, the Court constituted an Expert Committee chaired by former Supreme Court judge Justice Abhay Manohar Sapre. This committee, comprising notable members including OP Bhatt, Justice JP Devadhar, KV Kamath, Nandan Nilekani, and Somasekhar Sundaresan, was tasked with evaluating the factors that led to the recent volatility in the securities market and providing an overall assessment of the situation.

On May 6, 2023, the Expert Committee submitted its report to the Supreme Court, in compliance with the Court's interim order. The Court also granted SEBI an extension until August 14, 2023, to submit a status report on its investigation into the Adani Group. On August 14, SEBI filed an interlocutory application, updating the Court on the status of the 24 investigations it had undertaken. Later, on August 25, SEBI provided a more detailed status report outlining the progress and findings of these investigations.

The matter was again brought before the Supreme Court on November 24, 2023. Senior advocate Prashant Bhushan appeared for the petitioners, while Solicitor General Tushar Mehta represented SEBI. Bhushan strongly argued for the formation of a Special Investigation Team (SIT) to oversee SEBI's ongoing investigation into the Adani Group, emphasising the need for court-monitored scrutiny to ensure transparency and accountability.

On the other hand, Solicitor General Tushar Mehta, speaking on behalf of SEBI, informed the Court that 22 out of the 24 investigations were complete. He stated that enforcement actions or quasi-judicial proceedings would be initiated wherever applicable based on the findings. Mehta's assertion aimed to reassure the Court of SEBI’s diligence in addressing the allegations against the Adani Group, suggesting that the regulatory body was close to concluding its investigations.

In a consistent line of judicial precedent, the Supreme Court reaffirmed that when technical and specialised issues arise, particularly in financial and economic matters, it is essential to rely on the expertise of domain specialists. The Court emphasised that expert opinions, especially those from regulatory bodies like SEBI, should guide policy formulation and implementation. The judiciary should refrain from substituting its judgement for that of these experts unless actions are deemed arbitrary or in violation of constitutional or statutory requirements.

The Court noted that there were no valid grounds for it to intervene in SEBI's regulatory decisions or its amendments to financial regulations. It acknowledged SEBI's progress, with 22 out of 24 investigations into the Adani Group completed. The remaining two investigations were pending due to awaiting inputs from foreign regulators. The Court recorded SEBI’s assurance, provided by the Solicitor General, that the investigations would be concluded expeditiously. It directed SEBI to complete the pending investigations preferably within three months, emphasising that the process should not remain open-ended.

Additionally, the Court instructed SEBI and other investigative agencies of the Union Government to examine whether the losses incurred by Indian investors due to Hindenburg Research and other entities taking short positions involved any legal infractions. If any violations were found, suitable actions should be taken. With these directives, the Court disposed of the petition. 

In response to the Hindenburg report, SEBI has clarified that it conducted a thorough investigation into the Adani Group, completing 23 out of 24 inquiries. Following the investigations, the SEBI has issued show cause notices to seven Adani Group companies based on findings from the investigations. These notices pertain to alleged breaches of related party transaction regulations and non-compliance with listing norms. The affected companies include Adani Enterprises, Adani Energy Solutions, Adani Green Energy, Adani Ports, Adani Power, Adani Total Gas, and Adani Wilmar. Should the allegations be substantiated, the companies could face monetary or other penalties. This action is particularly significant given that the Supreme Court had directed SEBI to probe the allegations made against the Adani Group.

The notion that the Adani Group has been exonerated is misleading. While investigations are ongoing, the complete truth will only emerge once these inquiries are concluded. However, the situation is complicated by scrutiny of the SEBI Chairperson's involvement in the scandal, raising concerns about whether the investigation will be fully impartial. This has led to growing calls for an independent probe to ensure transparency and restore investor confidence in both the markets and the market regulator.