A new chapter has emerged in the ongoing 18-month conflict between Hindenburg Research and India's Adani Group. The U.S.-based short-seller levelled fresh allegations, accusing Madhabi Puri Buch, the chairperson of India's market regulator, of having a ‘conflict of interest'. On August 10, 2024, Hindenburg Research published a report claiming that both Madhabi Puri Buch and her husband, Dhaval Buch, invested in an offshore fund connected to Adani. The report also criticized SEBI, the market regulator, for its “lack of interest” and failure to investigate Adani's alleged undisclosed network of Mauritius-based and offshore shell entities.
In its latest report, Hindenburg Research has released emails and publicly available records alleging that SEBI Chairman Madhabi Puri Buch and her husband, Dhaval Buch, held stakes in entities related to the Adani Group through obscure offshore investment funds, suggesting a conflict of interest that potentially benefited the Adani Group in “syphoning monies.” A key accusation is that Madhabi Puri Buch and her husband invested in an offshore fund launched by IIFL and managed by Anil Ahuja, who served as a director at Adani Enterprises in 2015. This fund was part of a complex, multi-layered structure under the Global Opportunities Fund, which was allegedly used by Adani associates to trade the group's shares in India. Hindenburg attempts to draw a connection between the couple's investments, their various professional associations, and the use of these offshore funds to argue that Ms Buch may have shown bias toward the Adani Group. Both Ms Buch and the Adani Group have denied these allegations.
Hindenburg Research has released email exchanges indicating that Ms Buch transferred her interests in an offshore fund to her husband shortly before her appointment as Whole-time Director at SEBI in April 2017, and they redeemed their $0.87 million investment in February 2018. The report also notes that during her tenure as a Whole-time Member at SEBI, Ms. Buch owned a Singapore-based consulting firm, which she transferred to her spouse upon becoming Chairperson. Additionally, she held a 99% stake in an Indian consulting firm that generated ₹1.9 crore in revenue during FY22. SEBI implemented several regulatory changes for REITs after 2019, a period when Dhaval Buch was appointed as an advisor to Blackstone, a major REIT sponsor. These allegations suggest potential conflicts of interest in Ms Buch's role as SEBI Chair, which may have influenced the SEBI investigation into the Adani Group. However, there is no concrete evidence of wrongdoing presented.
What is a Conflict of Interest?
A conflict of interest arises when a person's or entity's private interests interfere with their professional duties, potentially leading to biased judgment. To manage such conflicts, individuals are often required to recuse themselves from decision-making processes.
In December 2008, SEBI introduced a Code under the chairmanship of CB Bhave to address conflicts of interest. The Code aims to uphold the integrity of the board's decisions and maintain public confidence in its members' impartiality. It highlights the need for transparency and accountability in managing conflicts.
According to the principles of the Code, members must take steps to ensure that any personal conflicts do not influence board decisions. Members are required to disclose any interests that might conflict with their duties. They must reveal their securities holdings and those of their family within 15 days of joining, at the end of each financial year, and any substantial transactions (i.e., transactions involving at least 5,000 shares or worth at least Rs 1,00,000) within 15 days of the transaction. No member, including the SEBI chairperson, should participate in matters where there is a conflict of interest. Members must disclose any direct or indirect interests in agenda items and must refrain from deliberating on those matters unless asked by the Board. Board members are prohibited from trading securities of listed companies based on insider information acquired through their official capacity. Members must disclose potential conflicts as soon as possible and seek clarification from the Chairman if uncertain. The Chairman, or the Board if necessary, will determine if a conflict exists and, if so, the involved member must abstain from handling the matter. Members must disclose any positions or relationships with regulated entities, including any past positions or significant relationships, and any honorary roles held in the past five years. However, members nominated by the Government of India or the Reserve Bank of India are exempt from these disclosure requirements if they are already covered under their parent organization's regulations.
SEBI's statement confirms that the Chairperson has complied with these disclosure requirements and recused herself from cases with potential conflicts of interest. The Board is responsible for scrutinizing the Chairperson's disclosures to ensure compliance.
The government should introspect
Leaders often shape the institutions they lead, and conversely, the institution can influence the character of its highest officeholder. The recent findings by Hindenburg Research challenge the equilibrium between institutional autonomy and accountability that such roles require. The market regulator's guidance to “remain calm and exercise due diligence before responding to such reports” seems more like a directive from the Sebi chief than a comprehensive response. It would have been more persuasive if it had addressed the numerous questions raised by the Hindenburg revelations.
These questions are: Did Buch disclose her investment in the sub-fund of the foreign portfolio investor that was also subscribed to by a company established by Vinod Adani? How did she respond when the Adani Group investigation first came to her attention, both during her tenure as a full-time director and later as chairperson? Did she offer to recuse herself when allegations concerning other investors in this sub-account emerged? Did she inform the board or the court that the SEBI probe included the period when she and her husband were involved in an investment transaction indirectly linked to Vinod Adani? Investor confidence in the securities market depends not only on SEBI's professional competence and institutional credibility but also on the integrity of its leadership. The regulator must not only uphold impeccable integrity but also be perceived as transparent and above reproach.
The revelations have placed the burden on the market regulator to clarify the allegations of market manipulation by the Adani Group, which the company has consistently denied. Ms Buch, who became a full-time director at SEBI in 2017 and was appointed chairperson in March 2022, had at least two clear opportunities to disclose her and her husband's investments in the Adani-related offshore fund. This disclosure is particularly important because, unlike a Systematic Investment Plan (SIP) in a mutual fund where individual investors have no direct control over their investments, offshore fund investments by high-net-worth individuals (HNIs) are managed by portfolio managers. In typical Portfolio Management Schemes, HNIs often have more direct interaction with their portfolio managers and better insight into how their funds are deployed. This raises the question: Did Ms Buch and her husband have “constructive knowledge” about the use of their invested funds?
To whom could she have disclosed this? Firstly, to the Supreme Court. Would the Court have dismissed a plea to establish a court-monitored team to investigate the allegations against the Adani Group if it were aware of the SEBI Chief's conflict of interest? Wouldn't it have instructed SEBI or the government to remove her from the investigation to determine the true economic ownership of 13 overseas entities—an issue the regulator has been grappling with since October 2020?
Secondly, to the six-member expert committee established by the Supreme Court in March 2023, which includes KV Kamath, Nandan Nilekani, and OP Bhatt. The committee's task was to investigate whether there was a regulatory failure in handling alleged violations of securities market laws by the Adani Group or other companies. If she disclosed this information to the committee, it was essential for the committee to report it to the Supreme Court.
Voluntarily disclosing investments to the SEBI board alone may not be enough when addressing the head of the market regulator. Informing the board does, in effect, keep the government updated, given that at least two secretaries from the Government of India and an RBI nominee are board members. For all practical purposes, the government would be considered fully informed. Before seeking external conspiracies or foreign interference to undermine Indian institutions, it might be prudent for these three individuals to examine internal matters more closely.
Given SEBI's role as a market regulator, any doubts cast on its chairperson could erode investor confidence in India's financial markets. To address these concerns, it is crucial to verify the claims made in the rebuttal. The government should promptly appoint an independent committee with a strict deadline to investigate these claims. In the interim, it might be prudent for the SEBI chairperson to consider a voluntary leave of absence to ensure transparency. The ongoing SEBI investigation into the Adani affair – one of 24 investigations still pending – has left it vulnerable to such scrutiny. Additionally, Hindenburg's recent focus on targeting an individual rather than addressing corporate governance issues has impacted its credibility. The market's muted response to the allegations reflects this loss of credibility.
Financial regulators must uphold the highest standards of integrity, akin to Caesar's wife—entirely beyond reproach. When questions arise about their conduct, it is crucial to resolve these doubts before proceeding with any other actions. Simply attributing concerns to a supposed cabal intent on destabilizing India's financial system is insufficient. The Supreme Court had previously dismissed a petition seeking a review of its January 3 verdict, which denied a request for a court-monitored inquiry into allegations in the Hindenburg Research report. In light of the serious allegations now surfacing, it would be prudent for the Supreme Court to establish an independent panel to investigate the Adani situation. Until this panel reports its findings, the SEBI chairman should step aside from the case. This step would bolster the reputation and credibility of India's capital markets.
The writer is a tax specialist, financial adviser, author, guest faculty and public speaker based in Goa. He can be reached at panditgoa@gmail.com or 9822983420
