Short seller shorts the regulator

When Hindenburg Research released its report last year accusing the Adani Group of fraud, its motive was clear. Hindenburg would short the Adani companies, their stock prices would go down because of its report, Hindenburg would make money.

Earlier this month Hindenburg released another report accusing SEBI chairperson Madhabi Puri Buch of, I don’t know, possible conflict of interest when it comes to Adani? SEBI hasn’t done much about all the fraud accusations against Adani, but it did investigate Hindenburg itself for what it thinks is insider trading.

But SEBI is a regulator! Not a company! There is no SEBI stock for Hindenburg to short. Whatever was Hindenburg hoping to get out of this report? It’s very unlikely it expected the entire Indian market or even the Adani stocks to fall with this report. If you have ideas, let me know. [1]

Bermuda, Mauritius, Shell Company

Hindenburg’s main accusation was that Madhabi Puri Buch had invested in the same fund which had been used to invest in the Adani companies to pump up their stock prices. Roughly, here’s what transpired:

1. In 2013, Vinod Adani (the main Adani’s elder brother) invested in the Bermuda-registered Global Dynamic Opportunities Fund. Let’s call this GDOF.
2. In 2015, Madhabi Buch and her husband Dhaval Buch invested in the same GDOF. They were both in Singapore at the time, and Buch had nothing to do with SEBI.
3. In 2017, Buch became a SEBI board member. Less than 2 weeks before this, Dhaval Buch wrote to the GDOF’s administrator and asked for their investment to be registered solely in his name.
4. The next year, in 2018, Madhabi Buch who is now a board member of SEBI, wrote to the fund management and redeemed their entire holdings. (Even though, technically, the investment was no longer in her name.)
5. In 2023, Hindenburg accused Adani of fraud. We know what happened after that.

The Buches invested some $872,000 (₹7.3 crore) in the Bermuda fund, which was only about 2.3% of the fund’s entire holdings. (The claim is that most of the $40 million in the fund was Adani money.) So the Buch duo contributed to a small portion of the fund and even redeemed all of it well before most of the controversies around Adani began.

Here is the Buches’ full statement after Hindenburg’s report. They say that they invested in GDOF only because the ultimate fund manager, Anil Ahuja, was Dhaval Buch’s childhood friend. Also this fund apparently never invested in Adani.

It seems very, very unlikely that the Buches were playing the long game or were in any way involved in inflating the stock prices of the Adani companies. But there’s more to this thing!

The Buches invested in the Bermuda-based GDOF, which itself invested in the Mauritius-registered IPE Plus Fund 1, which was the fund managed by Dhaval Buch’s childhood friend.

Vinod Adani incorporated a Mauritius-based company called Assent Trade and Investment. This company invested in the Bermuda-based GDOF. GDOF then invested in the Mauritius-based IPE Plus Fund 1, the same as the Buches. Now, we’re not clear with what exactly happened with this money, but separately, Vinod Adani’s company also invested in the Global Opportunities Fund, the parent fund of GDOF. This parent fund, also Bermuda-based, invested in two Mauritius-registered funds called the Emerging India Focus Funds and the EM Resurgent Fund. These are the two funds which ultimately bought Adani companies’ stock.

If you didn’t understand this very well, that’s okay. It’s intentionally confounding. (I wrote about this complex structure in an earlier post.) The point is that Vinod Adani invested in Adani companies and was moving money around from Mauritius to Bermuda to Mauritius using a shell company, and one of the funds that his money wound up in was the same fund managed by Dhaval Buch’s childhood friend.

If you were the SEBI chairperson and in the course of your investigation you discover that one of the funds that you invested in more than 6 years ago was also somewhat connected in what was an apparently shady investment structure whose only purpose could be to hide the real ownership of the funds—what do you do? You have two options:

1. You ignore it. You’re confident that you or your fund manager did no wrong.
2. You inform the rest of the board members of this loose connection and offer to recuse yourself from the rest of the investigation. Why even risk the faint whiff of a conflict of interest for an episode that has been so emotional and political anyway?

Madhabi Puri Buch picked the first option.

Someone’s got a side gig

The classic way for a company to pay some bribes is to report the bribe expenses as “consulting fees”. This works for the company because it pays this fee to a real consultant. It’s this consultant who then takes some of that money and gives it to a politician or a bureaucrat or whoever else that is bribe-worthy. The company has a legitimate expense to show in its books while remaining unconnected to the bribe-taker in question.

This consulting fee facade works on the bribe-giver’s end, but of course, it wouldn’t work on the bribe-taker’s end. If you’re a politician or a bureaucrat, you’re not a consultant, so what are you even doing taking consulting fees from a company which is coincidentally also one which requires your go-ahead to mine some forests? [2]

Well, here’s a bit from from Hindenburg’s report:

Madhabi Buch Currently Has A 99% Stake In An Indian Consulting Business Called Agora Advisory, Where Her Husband Is A Director

In 2022, This Entity Reported $261,000 Revenue From Consulting, 4.4 Times Her Disclosed Salary At SEBI.

Hindenburg hasn’t used the b-word but obviously the implication here is that Buch’s consulting firm which makes a good ₹2 crore ($250,000) in revenue just in India charges “consulting fees” that we spoke about earlier.

I wouldn’t think so though! I’d be more suspicious if this was, I don’t know, an artisanal potato farming business. Consulting fees screams bribes, potatoes would look more innocent.

Of course, the SEBI chairperson owning a consulting business on the side isn’t a good look. Also not allowed. Here’s an explanation from the Buches:

The two consulting companies set up by Madhabi during her stay in Singapore, one in India and one in Singapore, became immediately dormant on her appointment with SEBI. These companies (and her shareholding in them) were explicitly part of her disclosures to SEBI.

After Dhaval retired from Unilever in 2019, he started his own consultancy practice through these companies. Dhaval’s deep expertise in Supply Chain allowed him to work with prominent clients in the Indian industry. Thus, linking accruals in these companies to Madhabi’s current government salary is malicious.

When the shareholding of the Singapore entity moved to Dhaval, this was once again disclosed, not just to SEBI, but also to the Singapore authorities and the Indian tax authorities.

?? The consulting company went dormant and yet managed to earn more than ₹2 crore in revenue? Consultants usually have a tough time getting clients to pay up. The Buches’ clients pay them even if the company goes dormant. It would’ve been nice to see clearer disclosures from the chairperson of SEBI. One of her jobs is ensuring that everyone she regulates is constantly filing disclosures, after all.

Footnotes

[1] I’m as cynical as they come about these things, so I don’t believe it, but here’s what Hindenburg says about why it’s doing this:

With a rise in the killing or jailing of journalists in India, and a plummeting of press freedom scores in the country, we anticipated that the apparatus of Indian government may concoct a case to attempt to scare us or others out of the market, or worse.

We knew these risks before we started. Ultimately, that didn’t matter in the face of our resolve to publish in the public interest once the work met our evidentiary standards.

There was never a point where the Adani thesis was financially justifiable for us. It was even less justifiable from a personal risk and safety perspective.

But, to date, our research on Adani is by far the work we are most proud of.

[2] Politicians can of course just own businesses and show whatever income they like for them. Bureaucrats typically can’t have a second income.

[3] Ironically, SEBI felt that Hindenburg—a short-selling firm which published a short report saying that it would be short Adani—did not make clear disclosures in its short report on Adani.