Indian Securities Regulator Takes Issue with Foreign Short Seller Report

US investment research firm Hindenburg posted the full text of a “show cause” notice it received from India's Securities and Exchange Board ("SEBI"), which alleges that Hindenburg's January 2023 report on Adani Group was misleading because the firm was “indirectly participating in the Indian securities market.” Hindenburg countered that it had publicly fully disclosed its short position. Further, SEBI alleges that Hindenburg shared an advance copy of the report with US hedge fund Kingdon Capital Management. Hindenburg has not disclosed the name of its investment partner, but admits it made “$4.1 million in gross revenue through gains related to Adani shorts from that investor relationship” and “$31,000 through our own short of Adani US bonds.” 

Hindenburg, which has no office or employees in India, has issued a bold response, joining battle against India's top securities regulator by calling SEBI's notice an “attempt to silence and intimidate those who expose corruption and fraud perpetrated by the most powerful individuals in India." In its public response, Hindenburg notes just how important words are for the Indian regulator. SEBI took issue with Hindenburg's use of the term ”scandal" to describe a fraud scheme by Adani, and use of “leniency” to describe how bans on Adani Group entities for stock market manipulation were lessened to token fines. 

Hindenburg has three weeks to respond to SEBI's allegations, although how the Indian regulator plans to exercise jurisdiction over a US firm remains an open question. Notably, the regulator's contentious dealings with the foreign short-seller comes after Prime Minister Narendra Modi's weak victory raised questions about his administration's ability to continue the business-friendly reforms needed to sustain the country's rapid economic development. It is not yet clear how SEBI's effort to take on a US short seller might be viewed by foreign investors. While investors increasingly look toward India for opportunities to deploy capital previously earmarked for China, opportunities like this will not last forever.