The SEBI’s authority to take direct action against Hindenburg Research may fall into a grey area given the jurisdictional limitations, said experts.

The US-based research firm is not registered with SEBI. Its employees and consultants are not Indian, nor any of its operations based out of India.

“SEBI primarily exercises its regulatory powers within India and extending these powers to entities operating abroad is challenging. Section 1 of the SEBI Act, 1992, applies to ‘whole of India’ and courts interpret ‘nexus’ theory to ascertain whether a foreign entity would fall under the jurisdiction of SEBI,” said Sumit Agrawal, Founder, Regstreet Law Advisors.

However, SEBI can collaborate with international regulatory bodies such as the US Securities and Exchange Commission through mutual cooperation agreements as well as multilateral MoUs under IOSCO (International Organization of Securities Commissions), said Agrawal. Such collaboration can facilitate the investigation and enforcement of cross-border securities law violations, allowing SEBI to address concerns indirectly, he said.

“SEBI might pioneer new protocols for global regulatory enforcement and advocate for an international regulatory consortium to address globalised securities market challenges,” said Ravi Prakash, Associate Partner, Corporate Professionals.

Infringements

Hindenburg has allegedly violated the SEBI Act, 1992, PFUTP Regulations (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market), 2003 and Research Analysts Regulations, 2014, by misleading and inducing investors.

Issue of reports by research analysts outside India requires entering into an agreement with a research analyst or entity registered under the SEBI (Research Analyst) regulations.

“It is unclear whether Hindenburg was in compliance with the said requirement,” said Harish Kumar, Partner at Luthra and Luthra Law Offices India

In its show-cause notice, SEBI said the price fall in Adani Group shares were exacerbated by misleading statements in the Hindenburg report. The report was a circumvention of rules pertaining to research analysts. It said the noticees profited unfairly and indulged in unfair trade practices. And that foreign entities associated with Hindenburg took a short position in the securities of Adani Enterprises just before the release of the report. Such entities gained on the basis on non-public information.

Hindenburg, in the reply published on its website, claimed that SEBI has failed to identify any specific factual inaccuracies in the report.

“All these claims do not exempt Hindenburg from potential violations mentioned by SEBI in the show-cause notice, specifically regulation 12A of SEBI Act, 1992 read with regulation 3 and 4 of PFUTP Regulations, 2003,” said Kshitij Asthana, Leader-Capital Markets Practice, Singhania & Co.

Actions

Depending on the findings, SEBI could propose banning Hindenburg from participating in Indian markets, discredit their reports for a particular time period, impose monetary penalties or issue directions to cease and desist, said experts.

The litmus test would be to determine if ban on entities like Hindenburg or a whistle-blower is itself in the interest of securities market, said Agrawal. Potential bans or fines as a preventive measure against criticism of Indian companies would raise more questions for SEBI, he said.

“In appeals, courts may need to examine the history and future implications of the case to determine if it is intrinsically linked to the business and political environment. Hindenburg may argue that the action by the regulator constitutes a “scheme” or “artifice” of malicious prosecution against it. This scrutiny could complicate SEBI’s position and necessitate a thorough examination of the case’s intrinsic links to the regulatory environment,” Agrawal said.

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