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| Adani-Hindenburg case |
The Adani-Hindenburg case has drawn attention following a report from Hindenburg Research, which claimed that SEBI chairperson Madhabi Puri Buch held interests in offshore entities associated with the Adani Group. The report from the US-based short seller includes several key terms, including stock manipulation, offshore entities, and short positions.
In the Adani-Hindenburg case, Hindenburg Research, a short-selling firm based in the United States, claimed in a report on August 10 that Madhabi Puri Buch, the chairperson of the Securities and Exchange Board of India, along with her husband, held interests in offshore entities associated with the Adani group.
In a series of late-night posts on X on Saturday, Hindenburg Research urged the SEBI chief to reveal the client list of all individuals or companies seeking her advice regarding their offshore investments.
The report from Hindenburg Research employed various market terminology to articulate its assertions. Below is a compilation of these terms along with their definitions.
Offshore Entities Outside the Country
The report highlighted the existence of offshore entities. Hindenburg Research has indicated that documents from whistleblowers suggest the chairperson of SEBI holds an interest in offshore entities associated with the Adani Group, which are purported to have misappropriated funds.
The term offshore refers to a location that is outside the home country of a company. In these jurisdictions, financial and banking regulations typically differ from those in the company's country of origin.
Offshore jurisdictions are typically island nations where businesses establish corporations, investments, and bank accounts. Corporations and affluent individuals often choose these locations for tax benefits, lenient regulations, or safeguarding their assets. While offshore companies operate within legal frameworks, they can also be misused for illicit activities.
Shell Organizations.
The Hindenburg report highlights shell entities based in Mauritius that are purportedly utilized to facilitate the transfer of billions of dollars through undisclosed related party transactions, unreported investments, and stock manipulation activities.
Shell entities refer to companies that are officially registered in a country but do not engage in any actual business activities.
These companies are not inherently illegal; however, they can be misused to conceal business ownership from regulatory authorities or the general public. Additionally, shell companies may serve as a means for legitimate businesses to engage in tax avoidance strategies.
The Organisation for Economic Cooperation and Development (OECD) defines a shell company as one that is officially registered, incorporated, or legally established within an economy, yet does not engage in any operational activities in that economy, functioning solely in a pass-through role.
Market Manipulation of Stocks.
Stock manipulation, commonly referred to as a 'pump and dump' scheme, involves the artificial control of security prices. In this scenario, stock prices can either rise or fall. The primary objective is to sway prices in a way that deceives other investors. This practice is prohibited by law in India.
Selling Position
The report indicates that SEBI did not claim any factual inaccuracies in the earlier report; however, it sought additional information regarding Hindenburg's short position.
A short position refers to a trading strategy where an investor sells a security with the plan to buy it back later at a reduced price. Traders typically engage in short selling when they anticipate a decline in the security's price in the near future.
SEBI characterizes a short position in a futures transaction as the scenario where the short party sells the commodity or security for delivery at a later date. In the context of options transactions, a short position occurs when the short sells either a call or put option and is required to assume a futures position if assigned for exercise.
Transactions Involving Related Parties
Hindenburg mentions undisclosed related party transactions several times throughout its report. These transactions involve agreements between two entities that share a prior business relationship or mutual interest. Typically, companies favor engaging in business arrangements with parties they know well or have aligned interests. The Companies Act of 2013 outlines the definition of related parties and the regulations that apply to them.
Tax Heaven
The Hindenburg report indicates that a company controlled by Vinod Adani made an investment in the "Global Dynamic Opportunities Fund" (GDOF) located in Bermuda, a British overseas territory known for its tax advantages. This fund subsequently invested in IPE Plus Fund 1, which is registered in Mauritius, another jurisdiction recognized as a tax haven.
A tax haven is a nation that imposes little to no tax obligations on foreign entities and individuals for their financial deposits, all within a secure environment. These jurisdictions implement unique tax regulations that appeal to businesses and individuals looking to safeguard their capital.
Nonetheless, they are frequently exploited for illicit tax evasion or money laundering activities. While the tax frameworks in these countries differ, they all provide a refuge for foreign investors seeking to avoid substantial tax burdens by relocating their assets there. The legal frameworks and governance in tax havens tend to be unclear, with stringent protections for personal data.
Stock Parking Facilities
Stock parking refers to the illicit practice of transferring shares to another party with the expectation that the original owner will repurchase them shortly thereafter. This tactic is designed to obscure the true ownership of the shares, creating the illusion of compliance with regulatory standards. According to the report, the trading behaviors of certain funds indicate that stock parking operations, along with questionable offshore entities, may have artificially increased the trading volume and/or price of several publicly listed Adani companies.
Transfer of Shares
The transfer of shares refers to the voluntary relinquishment of a shareholder's rights and responsibilities to another individual who desires to join the company. Shares can be transferred like any other movable asset, provided that the company's articles do not impose restrictions on such transfers. According to reports, the chairperson of SEBI has transferred her interest in Agora Partners to her spouse, Dhaval Buch, as indicated by share transfer records from Singapore.
Real Estate Investment Trusts, commonly referred to as REITs
A Real Estate Investment Trust (REIT) is a trust that is officially registered with the Securities and Exchange Board of India (SEBI) to engage in activities outlined in the SEBI (Real Estate Investment Trusts) Regulations of 2014. As per SEBI guidelines, a REIT generates capital by issuing units to investors and primarily allocates these funds to real estate assets.
The REIT operates under the framework established by the SEBI (Real Estate Investment Trusts) Regulations of 2014. The key participants in a REIT include the trustee, sponsor, and manager.
According to a report, in August 2020, Mindspace REIT, which is supported by Blackstone, became the second REIT in India to launch an initial public offering (IPO) following SEBI's approval. Dhaval Buch joined Blackstone as an adviser in July 2019, coinciding with SEBI's regulatory updates concerning REITs. The report suggests that these regulatory changes have been advantageous for private equity firms like Blackstone.
