Indian Supreme Court Closes the Curtain on Securities Board’s Adani Investigation

It was “The Largest Con In Corporate History,” according to the title of the scathing hundred-plus page report published by the U.S.-based short seller Hindenburg Research (Hindenburg) alleging a scheme of stock manipulation and accounting fraud by the Indian conglomerate Adani Group. With businesses operating across diverse industries including power generation, ports, airports, mining, renewable energy, media, and cement, the Adani Group, led by its namesake, CEO Gautam Adani, was a $218B business empire, as of January 23, 2023. The next day, Hindenburg released findings from its two-year investigation scrutinizing the Adani Group’s funding sources, among other corporate governance issues, precipitating a $150B crash in the market value of the Adani Group’s publicly listed companies and cutting the net worth of Mr. Adani — the world’s richest man at the start of the year — in half.

Hindenburg’s central claim asserted that the Adani Group, through large investments in their stock from offshore investment funds with alleged ties to the Group, violated Indian securities law surrounding minimum public shareholding requirements. In turn, the Indian Supreme Court ordered the Securities Exchange Board of India (SEBI), which had already been investigating the Adani Group’s links to offshore funds since 2020, to examine this issue, among others stemming from the Hindenburg report. However, SEBI ran into challenges identifying the individual investors with economic interest in the funds so was not able to connect them to the Adani Group. The Organized Crime and Corruption Reporting Project (OCCRP), on the other hand, published a report contending that two individuals with close relations to the Adani family, the Group’s majority shareholders, had traded Adani Group stock via some of the aforementioned offshore funds. Despite the OCCRP’s discoveries and Hindenburg’s original claim, the Supreme Court did wish not take the Adani Group’s investigation further; the Court recently declared that it would not appoint a separate investigative group to further probe the origin of the offshore funds and their connection to the Adani Group, maintaining that SEBI should close its investigation in the next three months. 

The Hindenburg report contended that the Adani Group violated Rule 19(A) of the Securities Contracts (Regulation) Rules of 1957 that specified a minimum public shareholding threshold. According to Hindenburg’s analysis, this violation entailed the ownership of much of the Adani Group’s supposedly public, non-insider stock holdings by offshore investment funds with close ties to the company. Rule 19(A) “requires listed companies to maintain minimum public shareholding of at least 25%.” This fraction of company stock is referred to as the “free float,” as it is owned by and can be freely exchanged between shareholders not part of the so-called “promoter group” of company insiders. Non-promoters include retail investors, mutual funds, foreign portfolio investors (FPIs), and insurance companies. Rule 19(A) is designed to mitigate stock price manipulation by promoters, ensuring that the market provides investors with an accurate reflection of a stock’s true value. Hindenburg concluded that “offshore shells and funds tied to the Adani Group comprise many of the largest ‘public’ (i.e. non-promoter) holders of Adani stock, an issue that would subject the Adani companies to delisting…” if SEBI were to agree and enforce Rule 19(A) accordingly. Specifically, Hindenburg named Gautam Adani’s elder brother, Vinod Adani, who is part of the promoter group, as “manag[ing] a vast labyrinth of offshore shell entities,” many of which “have collectively moved billions of dollars into Indian Adani publicly listed and private entities.”

The Supreme Court-overseen SEBI investigation into the Rule 19(A) question was not able to identify the individual investors with economic interest in the offshore funds linked to the Adani Group; thus, they could not ascertain the validity of Hindenburg’s claim. Following the Hindenburg bombshell, the Supreme Court appointed an Executive Committee to supervise SEBI’s investigation into whether the Adani Group contravened Rule 19(A), among other legal issues. The Executive Committee released a report on May 19, 2023, that described SEBI’s challenge in tracing the offshore funds to their main contributors. SEBI identified forty-two contributors to the assets of thirteen overseas entities but, even after working with overseas regulators and other Indian enforcement agencies, could not discover their owners. In turn, they could not ascertain whether the offshore funds traded Adani Group stock on behalf of its promoters. In 2018, SEBI did away with a provision that dealt with the “opaque structure” of FPIs that required them to “disclose every ultimate natural person at the end of the chain of every owner of economic interest with the FPI,” which may have played a role in their inability to discern ownership of the offshore funds allegedly linked to the Adani Group. In August 2023, SEBI added stricter disclosure requirements mandating that “high-risk” FPIs owning “more than 50% or possessing assets exceeding Rs 25,000 crore in a single corporate entity” disclose their “actual beneficiaries” to close this regulatory gap. Still, the Adani Group Rule 19(A) question remained unresolved. 

Conversely, since Hindenburg released its findings, the OCCRP published a report on August 31st, 2023 highlighting close ties between the Adani family and two men who heavily traded Adani Group stock via offshore investment funds — a contention that aligned with Hindenburg’s original claim. Based on files from multiple tax havens, bank records, and emails within the Adani Group, the OCCRP found that “hundreds of millions of dollars were invested in publicly traded Adani stock through opaque investment funds based in the island nation of Mauritius.” The OCCRP maintained that two men with established business ties to the Adani family and who had served as directors and shareholders in Adani Group companies, Nasser Ali Shaban Ahli and Chang Chung-Lin, used two of these Mauritius funds to buy and sell Adani stock. This claim tracks with Hindenburg’s mentioning of Mauritius-based offshore funds in their initial report. Also per the documents, “the management company in charge of their investments paid a Vinod Adani company to advise them in their investments.” Such discoveries would implicate the Adani Group for a violation of Rule 19(A) if the offshore funds were proven to have invested in Adani Group stock on behalf of the Adani Group’s promoters. 

Despite Hindenburg’s initial allegations of a Rule 19(A) violation by the Adani Group and the subsequent OCCRP report supporting the same claim, the Supreme Court recently declared that SEBI’s investigation did not meet the standard to be transferred to a Special Investigation Team and must cease within three months. The Supreme Court mandated this cessation even with their acknowledgement that SEBI faced challenges identifying the individual investors with  economic interest in the offshore funds under consideration and that the OCCRP report and other reporting could be potential “inputs” to a SEBI investigation. The Supreme Court’s ruling appears contradictory and raises doubts about the Court’s willingness to prosecute securities violations by powerful conglomerates. Now, given the roadblocks SEBI has experienced validating the OCCRP’s discoveries and a lack of expansion of investigative authority, it seems that the Adani Group will not face further investigation and legal action for their alleged violation of Rule 19(A).

Nealie Deol is a senior at Brown University studying Applied Math-Economics. He is a staff writer for the Brown Undergraduate Law Review and can be contacted at kieran_deol@brown.edu.

Veronica Dickstein is a sophomore at Brown University studying International and Public Affairs. She is a staff editor for the Brown Undergraduate Law Review and can be contacted at veronica_dickstein@brown.edu.