Abstract- In this article, we will delve into the key allegations made in the Hindenburg Research report, assess its impact on the Adani Group and the Indian stock market, and explore the legal ramifications and responses from various stakeholders. The release of the Hindenburg Research Report in January 2023, targeting the Adani Group, a major Indian conglomerate, had far-reaching consequences in the financial world. This impact analysis delves into the legal framework, violations, and regulations associated with this event. Section 1 states a brief introduction of the matter. Section 2 provides an overview of the Hindenburg Research Report, and the allegations it made against the Adani Group. It highlights the peculiar timing of the report’s release, coinciding with the Adani Group’s plans for a significant public offering. Section 3 explores the extensive impact of the report on the Adani Group and the Indian stock market. The Adani Group witnessed a staggering loss in market capitalization, prompting the Reserve Bank of India to intervene and banks to disclose their exposure to the group. Section 4 discusses the legal responses triggered by the report, including the involvement of the Supreme Court of India, SEBI’s role in addressing the allegations, the Adani Group’s defense, and Hindenburg Research’s stance. Section 5 delves into the legal framework in India, emphasizing the SEBI Act and Regulations, minimum public shareholding requirements, and the protection of Indian investors, highlighting SEBI’s jurisdiction in cases involving the interests of Indian investors, even when the alleged wrongdoing occurs outside India. Section 6 sums the entire debate up with a conclusion.

1. Introduction

Recently, the financial world witnessed a seismic event with the publication of the Hindenburg Research Report² on 24^th January, 2023 which targeted the Adani Group, one of India’s largest conglomerates. The report, rife with allegations of financial impropriety, prompted a series of events that not only led to a significant drop in the Adani Group’s stock prices but also raised questions about corporate governance, transparency, and regulatory oversight in India. Just within a week of the publication, the position of Gautam Adani (founder and chairman of the Adani Group) dropped down from the world’s third richest man to number fifteen on the Forbes rich list.3 A holistic analysis of the impact will be done below with main focus on the Legal framework, violations and regulations surrounding the same.

2. The Hindenburg Research Report: Allegations and Timing

Founded by Nate Anderson, CFA, CAIA, Hindenburg Research specializes in forensic financial research. It looks for situations where companies may have accounting irregularities, undisclosed related party transactions, illegal business or unethical financial reporting practices. In past, reports have been published raising serious allegations against globally present companies such as Nikola4 and Eros International. In 2023, the Hindenburg Research report, levied a barrage of allegations against the Adani Group. Among these, one of the most damning claims was that the group’s top leadership included a significant number of Adani family members, consolidating control of financials and decisions within a select few. Additionally, the report accused the Adani Group of various financial wrongdoings, including tax evasion through the use of shell entities in Mauritius, manipulation of earnings through offshore shell networks, and allegations of fraud. Along with the alleged financial frauds, it went on and alleged that Gautam Adani’s associates have had past run ins with the law and yet serve on the board right now. The Report relied on an investigation by the Department of Revenue Intelligence (DRI) that implicated Samir Vora, Gautam Adani’s brother-in-law in the diamond trading scam. It concluded by stating that Adani Group had draped itself in the Indian flag while systematically looting the nation.5

However, it is the peculiar timing of the publication of the report which raised eyebrows, as it coincided with the Adani Group’s plans to launch a Rs 20,000 crore follow-on public offer (FPO) by its flagship firm, Adani Enterprises. Despite the report, the company went ahead with the FPO launch. The FPO sailed through the initial hiccups and was fully subscribed on January 31. The company claimed that the FPO saw 112 per cent subscriptions mainly due to HNI investors on the final bidding day. But within a day, the company declared it has cancelled its Follow-On Public Offering (FPO) and will return money to its investors.6

3. Impact on Adani Group and Indian Stock Market

The release of the Hindenburg Research report had a profound impact on the Adani Group’s stock prices. In the week following the report’s publication, Adani Group companies collectively lost a staggering Rs 9 lakh crore in market capitalization. The group’s total market capitalization plummeted from Rs 19.2 lakh crore to Rs 10 lakh crore in a matter of days. The fallout from the report extended beyond the stock market. The Reserve Bank of India (RBI) intervened by instructing banks to provide details of their exposure to the Adani Group. State Bank of India (SBI), Punjab National Bank (PNB), and Bank of Baroda disclosed their respective exposures, adding further pressure on the group.7

4. The Legal Battle Unfolds

The Hindenburg Research report triggered a series of legal responses from various stakeholders. The key legal developments and responses are:

1. Supreme Court’s Involvement: Three Public Interest Litigations (“PILs”) were filed before the Supreme Court of India and out of which two were first heard on 10th February. Subsequently, on 13th February, in response to the gravity of the allegations and their impact on investors, the Supreme Court of India proposed the creation of an expert panel, which would include a judge, to investigate the matter. The Court sought input from the Union Government and the Securities and Exchange Board of India (SEBI) on ways to protect investors from market volatility. This move underlines the Court’s commitment to safeguarding investors’ interests and ensuring regulatory reforms if necessary. A bench consisting of the Chief Justice of India, DY Chandrachud, Justices PS Narasimha and JB Pardiwala had expressed the court’s concerns towards “examining, strengthening of the regulatory mechanisms to ensure that Indian investors are protected against the volatility, the kind of which was witnessed in the recent few weeks”.8
   
   
2. SEBI’s Role: The Securities and Exchange Board of India (SEBI) played a central role in addressing the allegations made in the Hindenburg Research report. SEBI stated that it was actively analyzing the situation and looking into the anomalous price movements of Adani Group stocks. It asserted its commitment to addressing market manipulation and ensuring compliance with regulations. Solicitor General Tushar Mehta has stated that the Securities and Exchange Board of India ( SEBI ) has majorly taken up the analysis of the issue to help in setting up a robust regulatory framework to cope with the volatility. Three Adani group companies — Adani Enterprises, Adani Ports and Special Economic Zone, and Ambuja Cements — have been placed under the short-term additional surveillance measure (ASM) of the stock exchanges BSE and NSE. This effectively means that intraday trading in these stocks would require a 100 percent upfront margin.
   
   Adani Group’s Response: The Adani Group vehemently refuted the allegations made in the report, defending its corporate practices and governance. It accused Hindenburg Research of ignoring Indian legal processes and dismissed many allegations as baseless, emphasizing that various adjudicating authorities and courts in India had already dismissed similar claims in the past. It had gone on to question the timing of the report, saying its publication ahead of the FPO “clearly betrays a brazen, malafide intention to undermine Adani Group’s reputation with the principal objective of damaging” the issue.9 According to the Adani Group, there are three key themes from the Hindenburg Report:
   
   
   • Selective and manipulative presentation of matters already in the public domain to create a false narrative
     
     
   • Complete ignorance or deliberate disregard of the applicable legal and accounting standards as well as industry practice,
     
     
   • Contempt for the Indian institutions including the regulators and the judiciary 10
     
     
3. Hindenburg Research’s Stand: In response to the Adani Group’s defense, Hindenburg Research maintained its position, standing by its research. It accused the Adani Group of attempting to divert attention from substantive issues and of using nationalist rhetoric to undermine its report. The research firm continued to assert that the allegations it raised were valid and that it had exposed financial irregularities.
   
   

5. Legal Framework In India

Several legal aspects come into play in the wake of the Hindenburg Research report:

1. SEBI Act and Regulations: SEBI has the authority to initiate proceedings against entities that engage in market manipulation, even if they are based outside India but affect Indian investors. Some of the essential provisions are:
   
   
   • Securities Exchange Board of India (“SEBI”) Research Analyst Regulations, 2014 (“R.A. Regulations”)11: It specifies that any person intending to disseminate a research report or assume the role of a research analyst must obtain a prior registration certificate from the Securities and Exchange Board of India (SEBI). Furthermore, the regulations establish that in the event of a foreign entity seeking to circulate a report concerning securities listed on an Indian stock exchange, such dissemination can solely occur through the establishment of an agreement with a SEBI-registered research analyst situated in India. The Regulatory Authority (R.A.) Regulations additionally furnish a definition for a 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.”
     
     
   • In light of the subsequent depreciation in the Adani Company’s stock value following the publication of the aforementioned report, it can be inferred that the report functioned as a fundamental basis influencing investment decisions made by investors. Inasmuch as Hindenburg failed to enter into an agreement with a SEBI-registered research analyst in India for the purpose of disseminating the report, it is reasonable to conclude that Hindenburg violated the stipulations outlined in the R.A. Regulations.12
     
     
   • Securities And Exchange Board Of India Act, 199213 : 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 Fraudulent And Unfair Trade Practices Relating To Securities Market) Regulations , 200314, 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.”
     
     
   • Section 24 B: 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.
     
     
2. Minimum Public Shareholding: Indian regulations mandate that listed companies maintain a minimum public shareholding percentage. Failure to comply with these requirements can lead to regulatory action. In 2021 the public shareholding requirement was reduced to 5% for companies having a post-issue share capital in excess of INR 10 trillion in light of the listing of the Indian insurance behemoth, the Life Insurance Corporation of India.
   
   The present position on minimum public shareholding incorporates a graded approach, based on company size. In addition, all listed companies must gradually increase their minimum public shareholding until they achieve the 25% mark.15  The Hindenburg Research report and its impact on Adani Group stock prices may prompt further scrutiny in this regard.
   
   
3. Protection Of Indian Investors: The Indian legal framework, as established by various court decisions, empowers regulatory bodies like SEBI to protect Indian investors’ interests, even when alleged wrongdoing occurs outside India.
   
   
   • In the case of Pan Asia Advisor v. SEBI 16, 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 Association17, 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.

6. Concluding Remarks

The publication of the Hindenburg Research Report has undeniably sent shockwaves throughout the financial world. From a legal perspective, the response to this event has been swift and multifaceted. The involvement of the Supreme Court of India, with its proposal to form an expert panel, underscores a commitment to safeguarding the interests of investors and potentially implementing regulatory reforms. SEBI’s proactive stance in analyzing the situation and addressing market manipulation is crucial for maintaining trust in the Indian financial markets.

The legal battle has raised important questions about the role of regulatory bodies in protecting investors and maintaining market integrity. Regarding the Adani Group’s response, it is within their rights to vehemently defend their corporate practices and governance. However, the timing of the report and the subsequent cancellation of the FPO raise legitimate questions about transparency and the motivations behind these actions. The allegations of selective presentation, disregard for legal and accounting standards, and contempt for regulatory authorities should be addressed transparently to maintain trust in the corporate sector.

Hindenburg Research, as an entity conducting forensic financial research, has a duty to stand by its research and the validity of its allegations. However, it is equally important for them to engage constructively with regulatory bodies and address concerns raised by the Adani Group to ensure a fair and transparent resolution.From a personal standpoint, this incident highlights the critical need for robust regulatory frameworks, transparency, and accountability in the financial sector. It is imperative that regulatory bodies like SEBI continue to evolve and adapt to emerging challenges to protect the interests of investors and maintain the integrity of the financial markets. Furthermore, it serves as a reminder to companies to prioritize ethical practices, compliance with regulations, and transparent communication to build and maintain trust with investors and the public. Ultimately, the resolution of this legal battle will set important precedents for the Indian financial industry and its global standing.

1Third Year B.A. LL.B. (Hons.) student currently studying in University Institute Of Legal Studies, Panjab University, Chandigarh

2Adani Group: How The World’s 3^rd Richest Man Is Pulling The Largest Con In Corporate History ; Hindenburg Research, January 24, 2023 https://hindenburgresearch.com/adani/

3Explainer: Adani vs Hindenburg: What You Need To Know; Reuters; February 2, 2023 https://www.reuters.com/markets/adani-vs-hindenburg-what-you-need-know-2023-01-31/

4Nikola: How To Parlay An Ocean Of Lies Into A Partnership With The Largest Auto OEM In America; Hindenburg Research; September 10, 2020 https://hindenburgresearch.com/nikola/

5Adani v Hindenburg Simplified; Finshots; 31 January, 2023 https://finshots.in/archive/adani-vs-hindenburg-simplified-2/

6Adani Stocks M-Cap Plunges Nearly 50% In 7 Sessions After Hindenburg Report: 10 Latest Updates; Business Today; February 4, 2023
https://www.businesstoday.in/latest/corporate/story/adani-stocks-m-cap-plunges-nearly-50-in-7-sessions-after-hindenburg-report-10-latest-updates-368918-2023-02-04

7Hindenburg Effect: Rs 9 Lakh Crore M-Cap Gone! What’s Next For Adani Group Stocks ?; Market Today; February 3, 2023
https://www.businesstoday.in/markets/top-story/story/hindenburg-effect-rs-9-lakh-crore-m-cap-gone-whats-next-for-adani-group-stocks-368865-2023-02-03

8The Adani Stock Meltdown : The Hindenburg Report and its climacteric effect on the Adani Shares; Prime Legal; February 12
https://primelegal.in/2023/02/12/the-adani-stock-meltdown-the-hindenburg-report-and-its-climacteric-effect-on-the-adani-shares/#:~:text=The%20Hindenburg%20report’s%20accusations%20have,all%20Indian%20laws%20and%20regulations.

9https://www.outlookindia.com/business/adani-group-says-examining-legal-options-against-hindenburg-research-news-256900

10Hindenburg Ignores Indian Legal Processes: Adani Group On The Firm’s Allegations; Business Insider India; January 30, 2023
https://www.businessinsider.in/business/news/hindenburg-ignores-indian-legal-processes-adani-group-on-the-firms-allegations/articleshow/97431153.cms

11https://www.sebi.gov.in/legal/regulations/aug-2023/securities-and-exchange-board-of-india-research-analysts-regulations-2014-last-amended-on-august-18-2023-_76362.html ( Came into force on 01-12-2014)

12Analysis of Hindenburg Fiasco concerning Adani from the Perspective of Securities Law in India; Ravishekhar Pandey; Bar And Bench; February 21, 2023
https://www.barandbench.com/law-firms/view-point/analysis-of-hindenburg-fiasco-concerning-adani-from-the-perspective-of-securities-law-in-india

13SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 [15 OF 1992] ( Came into force on 04-04-1992) https://www.sebi.gov.in/legal/acts/jan-1992/securities-and-exchange-board-of-india-act-1992-as-amended-by-the-finance-act-2021-13-of-2021-w-e-f-april-1-2021-_3.html

14SECURITIES AND EXCHANGEBOARD OF INDIA (PROHIBITION OF FRAUDULENT AND UNFAIR TRADE PRACTICES RELATING TO SECURITIES MARKET)REGULATIONS, 2003 ( Came into force on 17-07-2003) https://www.sebi.gov.in/legal/regulations/jan-2022/securities-and-exchange-board-of-india-prohibition-of-fraudulent-and-unfair-trade-practices-relating-to-securities-market-regulations-2003-last-amended-on-january-25-2022-_55604.html

15The Hindenburg Report On Adani—A Case To Revisit Minimum Public Shareholding Requirements; Arjya Majumdar, Yash Gupta; Oxford Business Law Blog; February 16, 2023
https://blogs.law.ox.ac.uk/oblb/blog-post/2023/02/hindenburg-report-adani-case-revisit-minimum-public-shareholding

16Civil Appeal No.10560/2013

17Appeal (civil) 2330  of  2000