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Blame game starts between Hindenburg and Kotak Bank: After short-seller claims Kotak created and oversaw fund to bet against Adani, Kotak denies claims

Hindenburg said that brokerage firms founded by Uday Kotak created and managed the offshore fund structure that was used by its investor partner to bet against Adani group shares. It added that SEBI only referred to the K-India Opportunities fund and used the acronym 'KMIL' to mask the 'Kotak' name.

The US-based short-selling firm Hindenburg made headlines last year for a hit piece against the Adani Group. On Monday (1st July 2024), Hindenburg said it used a fund created by Kotak Mahindra Bank to take a short position on Adani stocks. The development comes days after the short-selling firm received a 46-page ‘show cause notice’ from the Indian market regulator, the Securities and Exchange Board of India (SEBI). The notice stated that Hindenburg’s January 2023 report on the Adani Group had certain misrepresentations and inaccurate statements that were meant to mislead readers.

While responding to the notice it received on 27th June, Hindenburg said that the notice was an “attempt to silence and intimidate those who expose corruption and fraud perpetrated by the most powerful individuals in India”. It also claimed immunity for its actions, arguing that SEBI doesn’t have jurisdiction over the firm. “Note that we are a US-based research firm with no Indian entities, employees, consultants, or operations, ” the US-based firm said. It then went on to allege that SEBI omitted the name of the private lender that was involved in short-selling Adani group shares. 

Hindenburg said that brokerage firms founded by Uday Kotak created and managed the offshore fund structure that was used by its investor partner to bet against Adani group shares. It added that SEBI only referred to the K-India Opportunities fund and used the acronym ‘KMIL’ to mask the ‘Kotak’ name.

“While SEBI seemingly tied itself in knots to claim jurisdiction over us, its notice conspicuously failed to name the party that has an actual tie to India: Kotak Bank, one of India’s largest banks and brokerage firms founded by Uday Kotak, which created and oversaw the offshore fund structure used by our investor partner to bet against Adani. Instead, it simply named the K-India Opportunities fund and masked the ‘Kotak’ name with the acronym ‘KMIL’,” Hindenburg said.

It then mentioned that KMIL stands for Kotak Mahindra Investment Ltd, an asset management company. 

Hindenburg added that Uday Kotak personally led Sebi’s 2017 committee on corporate governance. It alleged, “We suspect Sebi’s omission of Kotak or any Kotak board member may be to protect yet another powerful Indian businessman from scrutiny, a role Sebi seems to embrace.” 

It further alleged that the SEBI’s notice was intended to suggest that its legal and disclosed investment stance was secretive or dubious, or to present new legal arguments claiming jurisdiction over it. 

Hindenburg stated that the Indian regulator claimed that the disclaimers in its report were misleading because it was indirectly participating in the Indian securities market, and therefore, was short Adani. 

Regarding this, it said, “This was no secret—everyone knew we were short Adani because we disclosed it prominently and repeatedly.” 

In 2023, Hindenburg Research said that it held short positions in Adani Group companies through US-traded bonds and non-Indian-traded derivatives. However, it did not reveal the size of its bets or the specific derivatives and reference securities used.

Hindenburg further stated that it saw gains of only over $4 million in the short-selling episode that triggered a huge market erosion of around $150 billion in the market valuation of Adani Group’s listed companies. It added that it earned a gross revenue of about $4.1 million through gains related to Adani shorts from “one investor relationship”, which it didn’t name, and about “$31,000 through our own short of Adani US bonds,” Hindenburg said in its statement released on 1st July 2024.

Kotak Bank denies claims

Kotak Mahindra International Limited stated on Tuesday that Hindenburg Research, a U.S. short-seller, has never invested in the K-India Opportunities Fund.

Kotak was addressing accusations that Hindenburg collaborated with its client Kingdon Capital Management and utilized an offshore fund from the Kotak group to short Adani group shares last year.

“The Fund was never aware that Hindenburg was a partner of any of its investors,” Kotak said in a media statement.

Other key details in SEBI’s show-cause notice to Hindenburg Research

According to a report in the Hindu Bussiness Line, SEBI on page 10 of the show-cause notice mentioned the investment advisory agreement between Kingdon Capital and KMIL. Notably, Kingdon Capital was a client of Hindenburg Research. The short-selling firm shared its report on Adani with Kingdon Capital before its publication on 24th January 2023. 

In the notice, SEBI described the way how the trading was done and it noted that post-publication of the report in January 2023 the FPI squared off its short position making a significant profit of $22.25 million. 

The Hindu Businessline report added that SEBI’s investigation showed that the short position by KIOF (arm of Kotak Mahindra Bank) in Adani Enterprises futures was taken based on the draft of the Hindenburg report made available to it before it was made public.

The major developments in the Hindenburg Report saga

The Hindenburg Research, a short-selling firm, published a report, on 24th January 2023, accusing the Adani Group of fraud and stock price manipulation. The report came days ahead of the 2023 Budget Session of the Parliament which began on 31st January. 

Following the publication of the report, the Adani Group trashed the Hindenburg Research report as a ‘malicious combination of selective misinformation and stale, baseless and discredited allegations’. However, the Hindenburg report eroded Rs 46,000 crores in Adani group’s market capitalisation. 

Following a row over the Hindenburg report, India’s apex court, the Supreme Court ordered the market regulator, SEBI to probe allegations while setting up an expert panel to look into regulatory lapses. 

However, on 3rd January this year, the Supreme Court refused to order an SIT probe on the allegations made by Hindenburg Research against the Adani group. The Supreme Court in its order noted that third-party reports, without any verification, cannot be relied on as proof. The court observed that such reports can be treated as inputs but not conclusive evidence to doubt Indian authorities, in this case, it was the market regulator SEBI. 

The Supreme Court further added that there is no evidence that SEBI was negligent in taking action and no reason to suggest any conflict of interest on SEBI’s part. “SEBI has concluded investigations in 20 of 22 cases.” It also directed the SEBI to wrap up the investigation into the remaining two cases within three months. 

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