Four Issues SEBI Raised (Or It Couldn’t) in the Adani-Hindenburg Matter

SEBI's probe delves into the complexities surrounding foreign portfolio investors' ownership, concerns related to corporate governance, such as related party transactions, and auditors' roles.

New Delhi: On January 24, 2023, US-based short seller Hindenburg Research released a report, accusing the Adani Group of stock manipulation and accounting fraud. The report captured the attention of the financial world, with the Securities and Exchange Board of India (SEBI) spearheading an investigation into crucial facets of the allegations.

SEBI’s probe delves into the complexities surrounding foreign portfolio investors’ (FPIs) ownership, concerns related to corporate governance, such as related party transactions, and auditors’ roles.

FPI ownership

The Hindenburg report alleged that certain FPIs in Adani Group stocks were owned by shell companies situated outside India, closely linked to the group. According to the report, these investments allegedly helped the Adani Group artificially inflate stock values.

According to Rule 19(A) of the Securities Contracts (Regulation) Rules 1957, listed companies are mandated to maintain at least 25% public shareholding, ensuring transparency and preventing market manipulation. This 25% public shareholding is also called free float, that allows a company to raise money from the market. A higher free float helps in more accurate price discovery.

Hindenburg Research alleged that “offshore shells and funds tied to the Adani Group comprise many of the largest “public” (i.e., non-promoter) holders of Adani stock”. This means that several offshore funds, whose ultimate beneficiary is unknown due to their ‘offshore status’, were allegedly linked to the company. This is significant because these offshore funds, or FPIs, held most of the free float in the Adani listed firms.

The Wire had reported how some FPIs, whose details are not available online, kept on increasing year on year. Bloomberg columnist Andy Mukherjee had already written about these “silent soldiers”, or “Adani’s fortune drivers”, and that “they deserve some scrutiny”.

What problem SEBI faced while investigating this particular aspect was that in 2018, provisions requiring FPIs to disclose the “ultimate natural person” behind the FPI platform were done away with. This was revealed in the Supreme Court-led expert committee report, released on May 19, 2023.

In August 2023, SEBI tightened disclosure norms for high-risk FPIs to plug these gaps.

These include the categorisation of high-risk FPIs, wherein entities owning more than 50% or possessing assets exceeding Rs 25,000 crore in a single corporate entity are required to disclose their actual beneficiaries. The proposed classification designates all FPIs, excluding government and government-related entities like central banks, sovereign wealth funds, pension funds, or public retail funds, as high-risk FPIs.

In its investigation, the market regulator covered 12 “foreign portfolio investors who were public shareholders of Adani group companies”, per Reuters.

Also read: ‘Surprised We Don’t Have a Hindenburg in India’: Full Text of P.N. Vijay’s Podcast Interview

Related party transactions

The Hindenburg Research report alleged that the entities controlled by Vinod Adani, Gautam Adani’s elder brother, were used as a “conduit for money laundering and share-price manipulation”. Vinod Adani’s name was mentioned in the report 151 times.

On January 29, 2023, the Adani Group said that Vinod Adani “does not hold any managerial position in Adani listed companies”. On March 16, 2023, it said that Vinod Adani is part of the “promoter group” of various listed entities.

So while technically it may be true that Vinod Adani doesn’t have any managerial position in the firm, but the fact that the Adani Group is saying that ‘he and Adani should be seen as one’, it can be assumed he also has influence on the company’s management.

In August 2023, Reuters reported, citing sources, that SEBI had found violations in disclosing certain related-party transactions by the Adani Group.

SEBI has probed 13 instances of related-party transactions in the Adani matter.

Violations could result in penalties of up to Rs 1 crore for each violation by each entity. Furthermore, the potential imposition of these penalties could also lead to a ban from the stock markets, Reuters said.

Furthermore, his eventual stepping down from three companies, days before the Supreme Court set up the expert committee, raised serious corporate governance issues.

Note that SEBI has not raised any corporate governance red flags in the Adani Group.

SEBI headquarters in Mumbai. Photo: Jimmy Vikas/Wikimedia Commons. CC BY-SA 3.0.

Moreover, concerns were raised over the presence of Cyril Shroff, managing partner, Cyril Amarchand Mangaldas, as a member of SEBI’s committee on corporate governance, which looks at offences like insider trading. Shroff’s daughter is married to Gautam Adani’s son.

Also read: Adani Imbroglio Highlights Need for Strong International Corporate Governance Systems

In February 2023, The Wire’s Meetu Jain reported that a Singapore-based company, Gudami International Pte, named in the Hindenburg Research report as being an Adani group “related party” was mentioned in two chargesheets filed by the Enforcement Directorate in the AgustaWestland scam. These chargesheets were filed in 2014 and 2017.

Its name was subsequently dropped in the third supplementary chargesheet filed by the ED in 2018, after authorities in Singapore replied to the Letter Rogatory [these are letters of request sent by the court of one country to the court of another country for obtaining assistance in investigation or prosecution of a criminal matter] sent to them by the ED.

The role of auditors

An auditor’s role is crucial in providing an independent assessment of a company’s financial statements, ensuring transparency and reliability for investors, stakeholders, and regulatory bodies.

In the case of Adani Group, the resignation of Shah Dhandharia & Co., the statutory auditor for Adani Total Gas and Adani Enterprises, just a year after reappointment raised concerns. The firm, described as “tiny” by Hindenburg Research, noted that the audit partners were relatively young, sparking questions about their ability to scrutinise financials of major companies

The Morning Context had reported in October 2022 that Shah Dhandharia & Co. and Dharmesh Parikh & Co. – that audit most of Adani Group companies – have links to each other, and therefore, raise concerns over the group’s corporate governance.

The report said that Adani Group paid them a little over Rs 7 crore, as compared to Rs 84 crore paid by Mukesh Ambani’s Reliance Industries.

Separately, on May 31, 2023, Deloitte raised concerns over Adani Ports’ transactions with three entities, which the company said were unrelated parties. However, the auditor said it could not confirm that the parties were indeed unrelated.

In August of that year, it resigned as the statutory auditors of Adani Ports and Special Economic Zone (APSEZ). According to the Telegraph, APSEZ said Deloitte had resigned because it was not given a “wider audit role” covering other listed Adani portfolio companies.

The Adani Group’s ties with Howe Engineering Projects also contributed to governance concerns, as reported by Bloomberg.

In 2014, the Union government alleged that PMC Projects Pvt Ltd., affiliated with Howe Engineering, served as a conduit for Gautam Adani’s business to transfer funds overseas. Adani denied the allegation, and the investigation was dismissed. According to court records, in April 2016, PMC’s engineering activities were amalgamated into Howe.

Also read: Analysing the Adani Debacle

The OCCRP report

An investigation by the Organized Crime and Corruption Reporting Project (OCCRP) revealed that two Mauritius-based funds, the Emerging India Focus Fund (EIFF) and the EM Resurgent Fund (EMRF), traded extensively in shares of four Adani companies from 2013 to 2018.

Key foreign investors Nasser Ali Shaban Ahli and Chang Chung-Ling channeled approximately $430 million through the Global Opportunities Fund (GOF), the report said.

The probe revealed that Vinod Adani’s firm, Excel Investment and Advisory Services Limited, received over $1.4 million in advisory fees from these funds between June 2012 and August 2014.

“The investigators have not only dug up invoices and transaction records, but also internal emails which suggest that EIFF, EMRF and GOF were investing funds into the Adani group stocks at the behest of Excel Investment and Advisory Services Limited, that is, Vinod Adani,” reported the Hindu.

The evidence suggests that these funds may have been fronts for Vinod Adani’s significant investments in Adani group stocks, potentially breaching regulatory thresholds.

“If one adds the shareholding of Vinod Adani in three Adani companies – through offshore individuals and entities like Nasser Ali and Chang Chung-Ling via EIFF, EMRF and GOF, with the disclosed promoter group shareholding of those companies – the promoter group shareholding of Adani Enterprises and Adani Transmission stood at over 78% in January 2017,” the newspaper said.

As per law, promoters should hold not more than 75% stake in a listed company and the rest should be public float.

The Adani Group has denied all allegations.

Notably, the OCCRP investigations did produce new documentation/evidence to show that Vinod Adani worked closely with the two controversial foreign investors in the FPI, but OCCRP said it was unable to clearly prove they were indeed investing funds provided by Vinod Adani. It is expected that SEBI probe would find out more details. SEBI wrote to OCCRP possibly for this reason only.

The OCCRP report also highlighted a matter related to a Directorate of Revenue Intelligence (DRI) investigation.

After the Hindenburg revelations, as the matter began to be freshly probed by SEBI, the Supreme Court pronounced a judgment giving Adani a clean chit in the matter relating to DRI investigations, which had found massive over-invoicing of power equipment imports by the Adani group a decade ago. This matter had wound its way up to the Supreme Court after being challenged by the Adanis. The DRI investigations had named Vinod Adani as a key person who had over invoiced the imports and allegedly taken the company funds out of the country by inflating import costs, M.K. Venu, The Wire’s founding editor, explained.

The Supreme Court, however, ruled in favour of the Adani Group, saying it had already been given a clean chit by a finance ministry appellate authority. The top court suggested there was no reason to doubt the findings of the appellate authority, he said on the ‘Graphiti’ news show.

The Hindenburg report had alleged that the moneys taken out via allegedly inflated import costs has been invested back into the Adani stocks via dedicated FPIs run by a few individuals abroad.

The OCCRP’s investigation brought the issue of DRI sending a letter to SEBI to light. In a letter dated January 2014, Najib Shah, who was director general of DRI at the time, wrote to U.K. Sinha, warning about the Adani Group’s stock market dealings and suggesting that siphoned-off money might have been invested in and withdrawn from Adani Group stocks.

However, SEBI did not disclose receiving any such letter and evidence from the DRI.

This revelation raised questions about whether SEBI suppressed information or provided false details. The matter gained significance as the then SEBI chairperson, U.K. Sinha, who served until February 2017, is currently the “non-executive independent director-chairperson” of NDTV, acquired by the Adani Group in 2022.

In an interview to The Wire in February 2023, Sinha told Karan Thapar that he was not aware of any complaints of “round-tripping” involving Adani companies. “It is not SEBI’s task at what price they are trading unless there is some information available that some hanky-panky is happening,” he told Thapar.

However, in September of that year, when asked about the DRI letter, Sinha told Scroll.in that he couldn’t recollect what the facts are.

“You should not expect me in all fairness to remember everything what happened nine years ago, given that I retired from SEBI six years ago,” he told the news outlet. “I don’t recollect what the facts are.”

In January, the Supreme Court rejected any reliance solely on newspaper articles or reports from “third-party organisations” (referring to the OCCRP report) to challenge a thorough investigation conducted by the regulator. It ruled that there is no regulatory failure on SEBI’s part and hence no need for the Special Investigating Team to further investigate the matter.