What does Hindenburg do, and why is Sebi chief Madhabi Puri Buch in its crosshairs?

Hindenburg Research on Saturday levelled serious allegations against Sebi chief Madhabi Puri Buch and her husband, Dhaval Buch, claiming potential conflicts of interest linked to offshore funds connected to the Adani Group. 

These allegations have been swiftly dismissed by both Buch and the Adani Group, who have categorically denied any wrongdoing.

So who exactly are these Hindenburg guys?

Founded in 2017 by Nathan Anderson, Hindenburg Research is a forensic financial research firm that specializes in analyzing equity, credit, and derivatives. The firm looks for "man-made disasters," such as accounting irregularities, mismanagement, and undisclosed related-party transactions. Hindenburg typically invests its own capital in the companies it investigates, betting against them after publishing a report that highlights the alleged wrongdoings. 

The firm takes its name from the infamous 1937 Hindenburg airship disaster.

Adani is not the only one on Hindenburg's list

Hindenburg Research has targeted numerous companies since its inception, with some of its most high-profile cases including the electric truck maker Nikola Corp. Hindenburg accused Nikola of deceiving investors about its technological capabilities, leading to a significant drop in the company’s stock value. Nikola’s founder, Trevor Milton, was later convicted of fraud, and the company paid a $125 million settlement to the U.S. Securities and Exchange Commission.

The firm has flagged potential wrongdoing in at least 16 companies since 2017. Notably, Hindenburg played a role in the Twitter saga, initially taking a short position against Elon Musk’s $44 billion bid to take Twitter private, only to later bet against Musk by taking a long position.

Why the Sebi chief?

Hindenburg’s latest report, released on August 10, alleged that both Madhabi Puri Buch and her husband had stakes in obscure offshore entities linked to the Adani Group. These allegations come on the heels of a show-cause notice issued by SEBI to Hindenburg for violating Indian market regulations and profiting from short positions. The report has been met with strong denials from both the Buchs and the Adani Group, who described the claims as baseless.

How do these guys work?

In a 2023 article, Mark Humphery-Jenner, an Associate Professor in the School of Banking & Finance at UNSW Business School, explains strategies that Hindenburg and similar firms employ to profit from short selling. These include:

Selling Borrowed Stock: Short sellers borrow stock, sell it in the market, and later repurchase it to return to the lender, profiting from any decline in price.

Synthetic Short Positions: These involve derivatives like Contracts for Difference or Futures, which allow investors to take highly leveraged positions, amplifying potential gains or losses.

Put Options: Put options give the holder the right to sell an asset at a predetermined price, allowing them to profit if the asset’s price falls.

Bonds and Credit Default Swaps (CDS): Shorters may also invest in or short bonds, using instruments like CDS to bet against a company’s financial health.

These strategies, while legal, often raise concerns about market manipulation and insider trading. Regulators are vigilant, and it is illegal for an activist investor to publish false information to manipulate the market.

Is it legal?

Hindenburg’s tactics have sparked debate about the legality of its actions. The primary legal concerns involve market manipulation and insider trading. Publishing a malicious report to profit from a short position is illegal, as is trading on material non-public information. Regulators closely monitor such activities to ensure market integrity.