Analysis of Hindenburg Fiasco concerning Adani from the Perspective of Securities Law in India

The article dissects whether the publication of the Hindenburg report is in violation of securities law in India
Ravishekhar Pandey, Amarpal Singh Dua
Ravishekhar Pandey, Amarpal Singh Dua


On 24th January 2023, Hindenburg Research (“Hindenburg”), a U.S.-based research organization, published a report titled “How the World’s 3 rd Richest Man Is Pulling The Largest Con in Corporate History” on its website. According to Hindenburg, they investigated for two years, and in the report, they alleged Adani of brazen stock manipulation, accounting fraud, and improper use of tax havens. Hindenburg published the report just before the Further Public Offer (“FPO”) of ₹20,000 crore, which was called off on 1st February, 2023.

On 29th January, 2023, Adani published its response to the Hindenburg Report of 413 pages on its website. The response called Hindenburg nothing but a lie from the Mad offs of Manhattan and accused them of holding short positions in various listed companies of Adani Portfolio. The report affected the retail investors in India as the stocks of the top 10 listed companies of Adani plunged, and Adani enterprises crashed up to 25% as of 1 st February, 2023.

While the rift between Adani and Hindenburg continues, regulatory agencies are examining the allegations made in the report. Three Public Interest Litigation (“PILs”) were filed before the Supreme Court of India (“SC”) and out of which two were first heard on 10th February. Subsequently, on 13th February, the Central Government agreed to the suggestion of the SC to set up an expert panel to monitor the situation. It affirmed that the current statutory framework and regulatory agencies are competent to deal with the situation. This article aims to analyze the situation from the perspective of securities laws in India.

Who is Hindenburg?

According to the Hindenburg website, it is a forensic financial research organization founded by Nate Anderson. It has experience in investment management with a focus on equity, credit, and derivative analysis. In particular, they look for situations in which companies have a combination of accounting irregularities, undisclosed related party transactions, regulatory issues, etc. In addition to its financial research, Hindenburg undertakes active short selling. Hindenburg also held short positions in various listed companies of the Adani portfolio.

What is short selling?

Short selling is also known as shorting a stock. It is a trading technique where the seller sells shares he does not own. The seller borrows the shares by predicting that there will be a price decrease. The borrowed shares are sold to the buyer at the market price. When the price of the shares declines, the seller buys it at a declined price and books a profit. After buying the shares, the seller returns them to the original holder.

For example, A borrows 100 shares from B and sells them to C at ₹50, which is the market price. When the price drops to ₹30, A will repurchase the shares from C and return them to A. It is imperative to note on 25th January, 2023, after publishing, the report revealed that they held short positions in listed companies of Adani portfolio through the U.S. traded bonds and non – Indian reference securities.

Hindenburg's strategy to make profits using short selling and publication of reports

As indicated above, Hindenburg is a research organization that looks for companies with a combination of accounting irregularities, undisclosed related party transactions, regulatory issues, etc. After identifying the company, it publishes a detailed research report identifying those irregularities. The organization, just before publishing a detailed research report, takes short positions in that company (i.e., selling the shares without owning them) and then publishes the research report. Once the report is published, the market believes the report to be accurate.

The price falls, and the owners of the stocks/bonds start selling the stocks/bonds, and Hindenburg buys them at lower prices, thus making profits.

Can Hindenburg publish a research report without the prior permission of SEBI?

Securities Exchange Board of India (“SEBI”) Research Analyst Regulations, 2014 (“R.A. Regulations”) provides that any person who wants to publish a research report or act as a research analyst shall do so by obtaining a prior certificate of registration from SEBI. The regulations further provide that in case any foreign person wants to publish a report concerning securities listed on a stock exchange in India, it can only do so by entering into an agreement with a research analyst in India registered with SEBI.

The R.A. Regulations also define “research report” as “any written or electronic communication that includes research analysis, a research recommendation, or an opinion concerning securities or public offer, providing a basis for investment decisions.” After taking into consideration the fact that stocks of Adani company plunged after the publication of the report. It can be concluded that the report acted as a basis for investors' investment decisions. Since Hindenburg did not enter into an agreement with a research analyst registered with SEBI in India to publish the report. It can be concluded that Hindenburg has violated the R.A. Regulations.

Whether taking a short position by Hindenburg in Adani portfolio companies and then publishing the report violating PFUTP Regulations?

Short selling is considered a legitimate investment activity, and in India, the concept of regulated short selling is practiced. However, according to the strategy Hindenburg pointed out above, it wants to plunge the company's share prices using the publication of a report and then make profits.

Section 12A of the SEBI Act prohibits manipulative and deceptive devices for issuing, purchasing, or selling securities listed or proposed to be listed on any recognized stock exchange in India. The section has to read along with Regulation 4 of SEBI Prohibition of Unfair and Fraudulent (“PFTUP”) Regulations, 2003, which states that “dealing in securities shall be deemed to be manipulative, fraudulent, and unfair if it involves disseminating information or advice through any media, whether physical or digital which the disseminator know to be false or misleading recklessly or carelessly and which is designed to, or likely to influence the decision of the investor dealing in securities.”

In the case of N Narayan v. SEBI, SC held that the objective of the above provision was to curb market manipulation. The term market manipulation means unwarranted interference in the operation of ordinary market forces of supply and demand that undermines the integrity and efficiency of the market. Further, the SC in the case of Pooja Menghani v. SEBI held that even though the term unfair has not been defined in the Regulations. However, trade dealing is “unfair” if the conduct undermines ethical standards and good faith dealing in business transactions.

Hindenburg released the report on its website, which influenced the decision of the investors dealing in the securities of Adani. The report's release, moreover, led to interference in the ordinary market forces. The short positions by Hindenburg in listed companies of Adani portfolio indicates bad faith in business dealings. Therefore, Hindenburg has violated PFUTP Regulations.

Can SEBI proceed against Hindenburg if the allegations are found to be misleading?

While SEBI is investigating both sides, the allegations made by Hindenburg against the Adani Group as well as the market activity before and after the publication of the report as indicated to SC during the hearing of PILs. The question arises whether SEBI has the extraterritorial jurisdiction to initiate proceedings against Hindenburg if the allegations are found to be misleading and how the order will be enforced, considering Hindenburg is based in the U.S.

In the case of Pan Asia Advisor v. SEBI, the SC held that SEBI has the mandate to proceed against persons who are not corporally present within India. In case, the acts committed by them affect the interest of Indian investors. This indicates that the protection of Indian investors amounts to sufficient nexus for SEBI to initiate proceedings even when the underlying act takes place outside India.

In Haridas Exports v. All India Float Glass Manufacturers Association, the Supreme Court held that the MRTP commission would have jurisdiction to pass orders if the transaction was executed outside India if the effect of the transaction resulted in a restrictive trade practice in India. Thus, SEBI has jurisdiction to initiate proceedings against Hindenburg, even if it is based in the U.S., if the allegations against Adani are found to be misleading.

The other question arises is how the enforcement of the order will be done. It is imperative to note that India and the U.S. both are members of the International Organisation for Securities Commission (“IOSCO”), an International body that brings together all the securities regulators and sets standards for the securities sector. In May 2002, IOSCO signatories entered into a Multilateral Memorandum of Understanding for mutual assistance and exchange of information of their authorities for the purpose of enforcing and securing compliance with respective laws and regulations of the jurisdiction of authorities. Despite an appropriate framework, the enforcement of SEBI’s order in a practical sense is left open due to a conflict of domestic laws and other impediments.

Can Hindenburg be off the hook for violation of R.A. Regulations if its allegations prove to be Correct?

The SEBI Act under Section 24B prescribes for the power of the Central Government to grant immunity to entities which make a full and true disclosure in respect of the alleged violation, subject to such conditions as it may think fit to impose. The provision provides that such power must be exercised in consultation with SEBI. Now can such powers be exercised in favor of Hindenburg in the prevailing circumstances. For the Central Government to exercise any such power in favor of Hindenburg, there have to be certain peculiar circumstances –

a. Hindenburg has to make such an application to this effect;

b. The report of Hindenburg must contain solid evidence to back the allegations and must be cogent enough to enable SEBI to arrive at reasoned findings;

c. Consequently, SEBI must arrive at a conclusion that the report was in the form of a market intelligence and was thereafter used for orderly development of Indian Securities market.

The Supreme Court of India has held in past that fraud vitiates all past acts which are a consequent of such fraud. Hence, if a case of fraud is established against Adani, there is a bright possibility that the research firm gets off the regulatory hook, of course, subject to it making an application to that effect.


SEBI needs to investigate both sides, Adani and Hindenburg, and take appropriate actions. In case the allegations against Adani are found to be correct, an appropriate framework is necessary to control the spread of the information for the protection of the interest of investors. Suppose the spread of information is not controlled, any research organization outside India's jurisdiction can publish a research report alleging irregularities and create an impact on the Indian securities market, which will be detrimental to the interest of the investors.

About the authors: Ravishekhar Pandey, Practice Head, Securities & Capital Market, MDP & Partners. Amarpal Singh Dua was an Intern at MDP & Partners at the time of writing this article.

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