Introduction

On 24th January 2023, Hindenburg Research (“Hindenburg”), a U.S.-based research

organization, published a report titled “How the World’s 3rd 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 1st February, 2023.

While the rift between Adani and Hindenburg continues, regulatory agencies are examining the
allegations made in the report. Three 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.
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 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 –

 Hindenburg has to make such an application to this effect;

 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;
 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.

Conclusion
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.