Hindenburg Report: Was There a Conflict of Interest at SEBI's Top?

Hindenburg Report: Was There a Conflict of Interest at SEBI's Top?

On August 10, 2024, Hindenburg Research released its second report on the Adani Group titled “Whistleblower Documents Reveal SEBI’s Chairperson Had Stake In Obscure Offshore Entities Used In Adani Money Siphoning Scandal”. This follows their previous report on January 24, 2023, which had already stirred significant controversy in India.

While much of the latest report's content is circulating in the public domain, our forthcoming articles will delve into several critical issues. The release of such reports often sparks debates about the motives of the publishers—in this case, Hindenburg Research. The Adani Group has labelled Hindenburg as a discredited short-seller. Additionally, SEBI issued a show cause notice to Hindenburg on June 27, 2024, citing violations of securities laws. In a recent press statement, SEBI Chairperson Madhabi Puri Buch and her husband Dhaval Buch asserted that Hindenburg had been served with this notice due to various infractions. They expressed dismay that Hindenburg has opted to challenge SEBI's credibility and engage in what they termed a character assassination of the SEBI Chairperson rather than address the notice directly.

In light of these developments, our stories in the coming days will address whether Hindenburg had underlying interests influencing their Adani report. If such interests exist, it raises the question of whether their findings should be taken at face value. Alternatively, even if Hindenburg's motivations are questioned, we must assess whether their allegations are grounded in facts warranting a broader public inquiry.

Before tackling these considerations, we will first examine the specific allegations raised in Hindenburg’s latest report. 

What Hindenburg's Latest Report Alleges

Hindenburg's recent report raises several allegations involving Madhabi Buch, the current Chairperson of SEBI, and her husband Dhaval Buch. According to Hindenburg, the Buchs held stakes in obscure offshore funds linked to the Adani money siphoning scandal. These funds, based in Bermuda and Mauritius, were similar to those used by Vinod Adani, a key figure in the scandal. Hindenburg Research states that whistleblower documents show that Madhabi and Dhaval Buch opened their account with IPE Plus Fund 1 in Singapore on June 5, 2015. Madhabi Buch joined SEBI as a Whole Time Member in April 2017.

Hindenburg claims that just before Madhabi’s appointment to SEBI, Dhaval Buch emailed a fund administrator in Mauritius to request that he be the sole person authorised to operate their accounts. This action seemingly moved the assets out of Madhabi’s name.

The report also highlights an incident from October 2022, where Gautam Adani, Chairperson of the Adani Group, visited SEBI headquarters twice to meet Madhabi Buch. The report notes that on February 25, 2018, while Madhabi was a Whole-Time Member at SEBI, she reportedly personally wrote to India Infoline using her private Gmail account, doing business through her husband’s name, to redeem the units in the fund. 

Hindenburg's report points out that despite the many reputable mutual fund options available in India, the Buchs invested in a complex offshore fund structure tied to high-risk jurisdictions and entities involved in the Adani scandal. This raises questions about SEBI’s lack of action against such offshore shareholders, possibly due to Madhabi Buch’s involvement in similar funds, as per HIndenburg Research.

From April 2017 to March 2022, while Madhabi was a SEBI official, the report further notes that she fully owned an offshore consulting firm, Agora Partners, registered in Singapore. Two weeks after becoming SEBI Chairperson in March 2022, she transferred her shares in Agora Partners to Dhaval.

The report further notes that during Dhaval's tenure as Senior Advisor at Blackstone, a significant investor in Indian REITs, Blackstone was involved in sponsoring several REITs approved by SEBI, including Mindspace and Nexus Select Trust. Hindenburg suggests that SEBI, under Madhabi Buch's leadership, made regulatory changes benefiting Blackstone’s interests.

Additionally, Hindenburg claims that Madhabi Buch has promoted REITs in various industry conferences without disclosing her husband's connection to Blackstone, which stands to gain from these investments.

Finally, the report mentions that Madhabi still holds a 99% stake in an Indian consulting business called Agora Advisory where her husband is a Director. In 2022, Agora Advisory apparently reported $261,000 revenue from consulting which was 4.4 times higher than Madhabi Buch’s disclosed SEBI salary.

Hindenburg Report: Did SEBI's Chairperson Have a Conflict of Interest?

Hindenburg Research states that whistleblower documents show that Madhabi and Dhaval Buch opened their account with IPE Plus Fund 1 in Singapore on June 5, 2015. Madhabi Buch joined SEBI as a Whole Time Member in April 2017. On March 22, 2017, just weeks ahead of the politically sensitive SEBI appointment, Madhabi’s husband Dhavan Buch wrote to Mauritius fund administrator Trident Trust regarding his wife’s investment in the Global Dynamic Opportunities Fund. In the letter, Dhaval requested to be the sole person authorised to operate the accounts seemingly to move the assets out of his wife’s name ahead of the politically sensitive appointment. 

The Hindenburg report also notes that on February 25, 2018, while Madhabi was a Whole-Time Member at SEBI, she reportedly personally wrote to India Infoline using her private Gmail account, doing business through her husband’s name, to redeem the units in the fund. 

The question here is, if the Hindenburg report is factual, then while Madhuri Buch was serving as the whole-time Member of SEBI, how could she use her personal email account to conduct financial transactions through her husband’s name. 

Were SEBI's Conflict of Interest Regulations Violated?

SEBI has strict guidelines regarding conflicts of interest for its members to ensure that officials do not have personal financial interests that could influence their regulatory decisions. SEBI’s Code on Conflict of Interests for Members of Board was adopted in 2008 to ensure that it conducts in a manner that does not compromise its ability to accomplish its mandate or undermine the public confidence in the ability of the Members to discharge their responsibility. According to the general principles of SEBI's Code on Conflict of Interests: 

4.(1) A Member shall take all steps necessary to ensure that any conflict of interests to which he may be subject to does not affect any decision of the Board.
(2) A Member shall disclose his interests which may conflict with his duties.
(3) A Member shall not exploit to his personal advantage, any personal or professional relationship with regulated entities or any employee of such entities.

The question is whether Madhabi Buch's involvement in offshore funds constitutes a violation of these regulations, especially given SEBI's role in regulating such funds and the entities involved in this case. Did Buch violate SEBI's conflict of interest guidelines by directly using her personal Gmail account to write an email to conduct financial transactions through her husband's name?

Madhabi Buch in a press statement has acknowledged her involvement in the fund structure based in Bermuda and Mauritius, which has been linked to alleged financial misconduct by Vinod Adani. Notably, the fund was managed by a close associate of her husband Anil Ahuja, who was serving as a Director at Adani at that time. Hindenburg notes that Anil Ahuja was a Director of Adani Enterprises where he served three terms spanning nine years ending in June 2017. Prior to that he was a Director of Adani Power. 

Given that SEBI was responsible for investigating funds connected to the Adani controversy, doesn’t Buch’s personal investment in these very funds present a glaring conflict of interest?

Madhabi Buch also states in her press statement that the two consulting companies set up by her during her stay in Singapore, one in India and one in Singapore, became immediately dormant on her appointment with SEBI in 2017. But as per Hindenburg, the Indian entity, Agora Advisory Private Limited is still 99 percent owned by Madhabi Buch. This company is still active and is generating consulting revenues. This company has generated revenues worth 312,000 USD during the financial years 22, 23, and 24 while she was serving as the Chairperson of SEBI. A thorough investigation is necessary to determine whether a conflict of interest existed and, if so, to what extent it influenced any decisions.

Moreover, according to the Prevention of Corruption Act, 1988 public servants are prohibited from using their official position to benefit themselves or others. If Madhabi Buch's actions are found to have directly influenced her regulatory duties at SEBI, it could be seen as a violation of this act.

In her press statement, Madhabi Buch mentioned that due to her husband's involvement with Blackstone, the Blackstone Group was immediately added to her recusal list maintained with SEBI. However, what she did not state in her press statement was whether she recused herself from the 24 investigations related to the Adani Group that she oversaw. Is it ethically justifiable for government officials to conduct themselves in such a manner?

Madhavi Buch’s Retort

In their press statement on August 11, 2024, Madhabi Puri Buch and Dhaval Buch addressed the allegations brought against them by Hindenburg Research. They emphasised their commitment to transparency, providing an account of their professional backgrounds and the context surrounding the investments in question.

Madhabi, an alumnus of IIM Ahmedabad with a career spanning over two decades in banking and financial services, and Dhaval, a senior management professional with Unilever, explained that their savings and investments were accumulated through their respective careers, long before Madhabi joined SEBI.

The investment referenced in the Hindenburg report was made in 2015, while the couple was living as private citizens in Singapore, nearly two years before Madhabi's SEBI appointment. The decision to invest in the fund was influenced by Dhaval’s long-standing friendship with its Chief Investment Officer, Anil Ahuja, a seasoned professional with an extensive background in finance. They emphasised that the investment was purely based on Ahuja’s credentials and not linked to any Adani-related entities, as Hindenburg report insinuated. Furthermore, when Ahuja left his position in 2018, they decided to redeem their investment.

Regarding Dhaval’s role as a Senior Advisor to Blackstone, the Buchs clarified that this appointment, which began before Madhabi became SEBI Chairperson, was well-known and publicly disclosed. They assured that all necessary recusals were made to avoid any conflict of interest, with Blackstone being added to Madhabi’s recusal list at SEBI. Additionally, they addressed the operations of the consulting firms set up by Madhabi during their time in Singapore, noting that these firms became dormant once she took on her role at SEBI, with all requisite disclosures made to both SEBI and relevant authorities.

The Buchs strongly criticised the insinuations made by Hindenburg regarding their finances, describing them as malicious and motivated, especially the comparisons to Madhabi's current government salary. They stressed that SEBI’s regulations and circulars are decided by its Board and not solely by the Chairperson, further underlining their adherence to SEBI's code of conduct. The statement concluded by reaffirming their compliance with all disclosure and recusal norms, condemning Hindenburg's approach of attacking SEBI's credibility rather than addressing the show cause notice issued to them.

SEBI’s Response to Hindenburg Allegations

In its press statement, SEBI addressed the allegations made by Hindenburg Research, emphasising that these claims were misleading and lacked substance. SEBI clarified that it had thoroughly investigated the Adani Group, completing 23 out of 24 investigations and highlighted the rigorous process of enforcement proceedings.

The statement also responded to accusations of regulatory changes benefiting a specific conglomerate, explaining that all regulations are subject to extensive consultations and Board approvals. SEBI reiterated its commitment to transparency and its robust mechanisms for avoiding conflicts of interest, ensuring the integrity of India's capital markets.

Adani Group Responds to Hindenburg Research

In its press statement, the Adani Group dismissed the allegations made by Hindenburg Research as baseless and misleading. They described the claims as a deliberate and manipulative effort to profit from misinformation, using selective public data to draw false conclusions. 

The Adani Group emphasised that the accusations were recycled and had already been dismissed by the Supreme Court after thorough investigations. They reiterated their commitment to transparency and compliance with legal and regulatory standards, stating that their corporate structure is fully transparent and well-documented. 

The Group also distanced itself from the individuals and matters cited in the Hindenburg report, affirming that they had no commercial ties to them. Lastly, the statement criticised Hindenburg as a discredited short-seller with no regard for Indian laws, suggesting that their actions were intended to disrupt and manipulate the market.

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