Big win for Gautam Adani: Sebi dismisses Hindenburg charges against Adani Group

The stock market regulator on Thursday cleared Adani Group and its top executives of allegations of bypassing related-party transaction rules levelled by Hindenburg Research, bringing the curtains down on an episode that has stretched out across 15 months.

While Adani Group firms did route funds through three companies, as alleged by Hindenburg, these transactions were not illegal at the time they were made, the Securities and Exchange Board of India (Sebi) said. In two orders, signed by whole-time member Kamlesh Varshney, Sebi disposed of the proceedings against all noticees, which included Gautam Adani, his brother Rajesh Adani, and Group chief financial officer (CFO) Jugeshinder Singh.

The Sebi investigation was triggered by a Hindenburg Research report, which claimed that Adani Group companies used Adicorp Enterprises Pvt. Ltd, Milestone Tradelinks Pvt. Ltd, and Rehvar Infrastructure Pvt. Ltd as “conduit entities”. However, the group could not be penalized based on a 2021 amendment that was made after those transactions, Sebi said.

'Apologize'

Adani group chairman Gautam Adani praised Sebi's ruling and expressed sympathy for investors impacted by the report. He demanded an apology from those who have spread false narratives.

In a post on the social media platform X, Gautam Adani wrote, “After an exhaustive investigation, Sebi has reaffirmed what we have always maintained, that the Hindenburg claims were baseless. We deeply feel the pain of the investors who lost money because of this fraudulent and motivated report. Those who spread false narratives owe the nation an apology.”

Legal experts said the decision highlights a loophole that existed previously.

“The ruling in the limited, technical sense amounts to an admission that there was a regulatory gap before April 2023,” said Nirali Mehta, partner at Mindspright Legal. “The orders and the expert committee acknowledge that the pre-amendment textual framework had narrower reach and therefore, did not expressly capture certain indirect or interposed arrangements.”

Mehta added, “You cannot retrofit today’s definitions onto yesterday’s conduct. The decision signals less a verdict on intent and more an acknowledgment that the law itself has been tightened to address past blind spots.”

If such transactions occurred today, would they be classified as RPTs? “In most cases, yes,” Mehta said. “The amended definition expressly catches indirect transactions undertaken through third parties, if the purpose or effect is to benefit a related party of the listed entity. The amendment was deliberately framed to foreclose the sort of structural workarounds that gave rise to these investigations.”

'No diversion'

The regulator noted that all loan with interest has been repaid before the start of the investigation, and there was no allegation of diversion.

Sebi accepted Adani Group’s argument that the transactions were genuine commercial dealings undertaken in the ordinary course of business. It noted that intermediary entities had engaged in similar lending and borrowing activities with non-Adani companies, suggesting they were not exclusively conduits for the Adani Group.

The case hinged on the legal definition of an RPT. At the time of the transactions, Sebi's Listing Obligations and Disclosure Requirements (LODR) Regulations defined an RPT as a direct transaction between a listed company and an entity formally classified as a ‘related party’.

Sebi’s orders explicitly state that Adicorp, Milestone, and Rehvar were not related parties of the Adani Group companies under the then prevailing definition. Therefore, transactions routed through them did not require the disclosures and shareholder approvals mandated for RPTs.

The regulator acknowledged that it had since tightened the rules. A November 2021 amendment to the LODR Regulations expanded the definition of an RPT to include transactions with an unrelated party if “the purpose and effect of which is to benefit a related party”.

This new, stricter definition, which became effective from 1 April, 2022, would likely have covered the transactions in question. However, Sebi's orders stress that this was a substantive change in the law, not a mere clarification.

Prospective effect

The order highlights that the 2021 amendment was deliberately given deferred prospective effect, with a glide path for compliance extending to 1 April 2023. Sebi explained that this was done to enable companies to re-arrange their affairs to become compliant with the law.

“Once an approach is adopted, it must be implemented and adhered to, in accordance with the law. If past transactions were compliant with the law as was applicable when they were transacted, and more so, if changes have been made subsequently to outlaw a repetition of such past transactions, it would follow that there can neither be a repetition of the same structures in future nor can there be an attack on the validity of the past transactions,” the order stated, quoting a Supreme Court-appointed expert committee that reviewed the matter.

The Sebi board memorandum from September 2021, which proposed the amendment, was also cited to show the regulator's intent. The memorandum noted that “certain innovative structures have been used, in the recent past, to avoid classification of transactions as RPTs.” It stated the amendment was intended to ‘broaden the definition’ to include indirect transactions, making it clear that such transactions were not covered before.

Legally impermissible

“Once a choice has been made to apply this amendment to prospective transactions, it would be legally impermissible to attack past transactions”, the regulator said in its order.

Since the transactions were not deemed illegal RPTs, the associated allegations of fraud and unfair trade practices also fell apart.

“The main allegation of violation of Section 12A of the Sebi Act and PFUTP Regulations (Sebi regulations prohibiting fraudulent and unfair trade practices in securities market) in the show cause notice flows from non-classification of impugned transactions as related party transaction. Once it is held that there is no violation on that account, the charges do not stand,” the order stated.

Sebi said it had previously taken the same stance in another case, where it argued that the pre-amendment definition only covered direct transactions between a company and its related party.

"Accordingly, having considered the matter holistically, I find that the allegations made against noticees in the SCN are not established," Varshney wrote, concluding the probe without imposing any penalties or directions.

Little room to mount a challenge?

The legal path for investors to challenge the ruling appears narrow.

According to Rohit Jain, managing partner of Singhania & Co., the courts interpreted ‘a person aggrieved’ under the Sebi Act to mean a person who has suffered a legal grievance or has been directly and adversely affected by the decision. He elaborated that a member of the public who was not a party to the original proceedings would likely not have the legal standing to be considered an ‘aggrieved person.’

“They would need to demonstrate a direct, personal, and substantial injury beyond that of the general public to have their appeal admitted by the SAT (Securities Appellate Tribunal),” he said.

As for Adani, experts emphasized there was nothing preventing the group from pursuing action against Hindenburg. According to Singhania, Adani has the legal remedy to sue Hindenburg Research's founder Nate Anderson for defamation and the consequent loss of revenue. However, Mehta said that since Hindenburg has now ceased its business operations, there is little that can be done at this stage.