Unpacking the Hindenburg-Sebi Controversy: Allegations, Counter-Allegations, and Conflicts of Interest

The latest allegations by US short-seller Hindenburg Research have raised questions about the integrity and credibility of the Securities and Exchange Board of India (Sebi) and its chairperson, Madhabi Puri Buch.

Hindenburg ResearchSebiMadhabi Puri BuchAdani GroupConflict Of InterestReal EstateAug 19, 2024

Unpacking the Hindenburg-Sebi Controversy: Allegations, Counter-Allegations, and Conflicts of Interest

Real Estate:The capital markets watchdog, Sebi, and its chief, Madhabi Puri Buch, have found themselves in a tricky situation following the latest allegations made by US short-seller and activist-investor Hindenburg Research. The allegations have sparked a counter and counter-to-counter, leaving more questions than answers.

At the heart of the matter are two key issues concerning Madhabi Buch and her husband, Dhaval Buch. The first involves an investment in an offshore fund allegedly having links to the Adani Group, while the second includes Dhaval's appointment as Senior Advisor to Blackstone Private Equity in 2019. Hindenburg flagged both as 'massive conflict of interest,' while the Buchs dismissed the allegations as an attack on the 'credibility of Sebi' and an attempt at the 'character assassination of its chairperson.'

The controversy began 18 months ago when Hindenburg accused the Adani Group of stock manipulation and accounting fraud, which the company denied. The sensational report wiped off about $150 billion in market value from the 10 publicly-traded Adani group companies, leading to a broader market crash. Surprisingly, both the markets and the Adani group stocks met the latest round of allegations with shrugs.

Sebi, which has been probing the matter, is yet to conclude its investigation, which isn't unusual as such inquiries stretch for years. However, Hindenburg's latest accusations have cast fresh suspicions on the role of the regulator. Hindenburg believes that Sebi's unwillingness to take meaningful action against suspect offshore shareholders in the Adani Group may stem from Buch's complicity using the 'exact same funds used by Vinod Adani, brother of Gautam Adani.'

Sebi dismissed the charges and maintained that it had 'duly investigated' Hindenburg's allegations against the Adani Group. It also added that its chairperson had made the required disclosures in terms of holdings of securities and their transfers and that she had recused herself in matters involving potential conflicts of interest.

Hindenburg's latest report alleged that the Buchs first appeared to have opened their account with the controversial offshore investment vehicle named IPE Plus Fund 1 in June 2015, in Singapore. A declaration of funds with the asset management firm India Infoline (now 360 ONE) states that the source of the investment was salary and the couple's net worth was estimated at $10 million.

The Buchs clarified that the investments were made as private citizens in Singapore, and almost two years before Madhabi joined Sebi as a whole-time member in 2017. The investment, they reasoned, was made because of Dhaval's childhood friend Anil Ahuja, who was the fund's then chief investment officer.

The Financial Services Commission (FSC) of Mauritius too clarified that the fund named IPE Plus was neither a licensee of the FSC, nor domiciled in Mauritius.

Hindenburg stated that the Buchs' statement indeed confirms the investment in the Bermuda/Mauritius fund, allegedly linked to Vinod Adani, raising concerns of a massive conflict of interest. It also questioned Madhabi Buch's undisclosed income and potential conflicts with Sebi's regulatory duties, insisting that Madhabi holds 99% ownership in her India consulting firm Agora Advisory.

Public documents reviewed by Reuters show that Madhabi continued to earn revenue from Agora Advisory Pvt Ltd, where she holds 99% stake, while continuing her tenure at Sebi. As per Sebi norms, holding stake in itself may not be in violation of good practices, but earning revenue/profit does lead to potential conflict of interest.

During her seven-year tenure between April 2017 and March 2022, Agora Advisory generated Rs 3.7 crore revenue. For the fiscal year FY24, it reported revenue of Rs 14 lakh, with a net profit of Rs 809,882, according to Reuters data.

Madhabi stated that both Agora Advisory and its Singapore-based counterpart became dormant after her appointment at Sebi and that all her shareholdings and disclosures were made to Sebi, the Singapore authorities, and even the Indian tax authorities.

Hindenburg has called for Madhabi to release a full list of consulting clients and details of engagements through her offshore Singaporean firm, the Indian consulting firm, and any other related entities, to maintain transparency. It also demanded a full, transparent, and public investigation into these matters, questioning whether she has engaged in any other undisclosed investments or business activities through her husband while serving as Sebi chairperson.

The second allegation pertains to Dhaval's 2019 appointment in Blackstone Private Equity, which is one of the leading players in real-estate investment trusts (Reits), a nascent asset class in India. Hindenburg questioned the motive behind the appointment, citing Dhaval's expertise in supply-chain management, while the latter clarified that it predated Madhabi's Sebi stint and that he was never associated with Blackstone's Real Estate entity.

The opposition is pounding the drums, and called for a parliamentary inquiry into the accusations, which gravely compromise the integrity of Sebi, which is entrusted with safeguarding the wealth of investors. It has asked the government to eliminate all conflicts of interest in the Sebi investigation of Adani.

Till date, Sebi said it has completed 23 inquiries against Adani and the last one was close to completion. In June, it also issued a show-cause notice to Hindenburg, accusing it of violating US securities laws by colluding with an investor who made a short bet against the Adani group ahead of the report's release. Hindenburg dismissed the allegation.

Frequently Asked Questions

What are the allegations made by Hindenburg Research against Sebi and its chairperson?

Hindenburg Research has alleged that Sebi chairperson Madhabi Puri Buch has a massive conflict of interest due to her investment in an offshore fund allegedly linked to the Adani Group, and her husband's appointment as Senior Advisor to Blackstone Private Equity.

What is the response of Sebi and the Buchs to the allegations?

Sebi has dismissed the charges, maintaining that it had 'duly investigated' Hindenburg's allegations against the Adani Group, and that its chairperson had made the required disclosures. The Buchs have also clarified that the investments were made as private citizens in Singapore, and that they had recused themselves in matters involving potential conflicts of interest.

What is the opposition's stance on the allegations?

The opposition has called for a parliamentary inquiry into the accusations, which gravely compromise the integrity of Sebi, and has asked the government to eliminate all conflicts of interest in the Sebi investigation of Adani.

What is the current status of the Sebi investigation into Adani?

Sebi said it has completed 23 inquiries against Adani and the last one was close to completion. In June, it also issued a show-cause notice to Hindenburg, accusing it of violating US securities laws.

What is the demand of Hindenburg Research regarding the allegations?

Hindenburg has called for Madhabi to release a full list of consulting clients and details of engagements through her offshore Singaporean firm, the Indian consulting firm, and any other related entities, to maintain transparency. It also demanded a full, transparent, and public investigation into these matters.