Hindenburg case: Sebi dismisses allegations against Gautam Adani and group companies

Sebi held that the transactions did not qualify as related party transactions under the definition prevailing at the time.

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Capital market regulator he Securities and Exchange Board of India (Sebi) has exonerated Gautam Adani, brother Rajesh Adani, Adani Ports, Adani Power and Adicorp Enterprises, in its final order in the matter passed on September 18.  Sebi has disposed of proceedings in the matter of Hindenburg Research’s allegations against the Adani Group relating to fund routing through Adicorp Enterprises Pvt. Ltd., Milestone Tradelinks Pvt. Ltd., and Rehvar Infrastructure Pvt. Ltd.

"I find that the allegations made against Noticees in the SCN are not established. Considering the above, the question of devolvement of any liability on Noticees does not arise and hence the question of determination of quantum of penalty also does not require any deliberation," Sebi's Whole-time Member Kamlesh Varshney wrote in the order.

The U.S.-based short seller had alleged in its January 24, 2023 report that these entities acted as conduits to channel funds from Adani Ports & Special Economic Zone Ltd. (APSEZ) to Adani Power Ltd. and Adani Enterprises Ltd., thereby concealing related party transactions and violating Sebi’s Listing Obligations and Disclosure Requirements (LODR) and Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) Regulations.

Sebi’s findings confirmed that APSEZ had advanced loans to the three entities, which in turn lent money to Adani Power and Adani Enterprises. The loans were subsequently repaid with interest, including repayment by the intermediaries to APSEZ.

However, Sebi held that the transactions did not qualify as related party transactions under the definition prevailing at the time. The expanded definition introduced through the 2021 amendment to the LODR Regulations, effective from April 2022, could not be applied retrospectively. Sebi further noted that no funds were siphoned off or diverted, and all monies were repaid with interest. Accordingly, the transactions could not be classified as fraudulent, manipulative, or unfair.

The order detailed that there was no violation of the Listing Agreement or Sebi (LODR) Regulations, as the said transactions did not qualify as “related party transactions” under the framework applicable at that time. Kamlesh Varshney, Whole Time Member, Sebi, noted in the order: “A plain reading of the Listing Agreement and Sebi (LODR) Regulations reveals that transactions between a listed company and an unrelated party were not covered within the definition of ‘related party transactions’ as it existed during the time when the impugned transactions took place, though this was specifically included after the 2021 amendment.”

He further stated: “Even applying the ‘substance over form’ doctrine, Sebi held that the pre-2021 definition never intended to include within its scope transactions between a listed company and an unrelated party, even if a related party ultimately benefited.” The order further noted that the 2021 amendment was substantive in nature and, as per established legal principles, could not be applied retrospectively.

Sebi also relied on the findings of the Expert Committee appointed by the Supreme Court in the Vishal Tiwari case. The Committee observed that the 2021 LODR amendment was substantive, prospective, and not indicative of regulatory failure. The Supreme Court further rejected petitions challenging the amendment, holding that the regulatory process was legally valid and that no grounds existed to revoke the changes.

The two Sebi orders issued on Thursday relate to related party transactions. Sebi is also investigating cases involving alleged violations of minimum public shareholding norms, insider trading, and FPI regulations.

Adani vs Hindenburg Case

On January 24, 2023, US-based short-selling firm Hindenburg Research had released a damning report against the Adani Group, alleging stock manipulation, accounting fraud and the use of offshore tax havens and shell companies to route funds. Hindenburg had alleged that funds were moved out of Adani-controlled entities through multiple tax havens and then re-invested into listed Adani companies to artificially inflate share prices.

The report was released just days before Adani Enterprises was set to launch its Rs 20,000 crore follow-on public offer (FPO), significantly rattling investor confidence and triggering a sharp fall in Adani Group stocks.

Adani's Response

The Adani Group, in response, categorically denied the allegations as 'baseless and motivated by vested interests'.Among the entities named in the Hindenburg report were several Mauritius-based investment funds, including APMS Investment Fund, Cresta Fund, LTS Investment Fund, Elara India Opportunities Fund, and Opal Investments, which were said to have between 90–100% of their assets invested in Adani companies. The report also flagged Vespera Fund Limited, Lotus Global Investment Fund, and Albula Investment Fund Limited for similar exposure.