Adani-Hindenburg Sebi probe gets gripping with Kotak twist

Kotak Mahindra Bank in Kolkata, India. Image: Sudipta Das/NurPhoto via Getty Images

In what Hindenburg Research calls “the largest con in corporate history”, the plot got murkier on Tuesday with the US-based research firm accusing another Indian corporate of being part of the nexus. The firm claims that the Securities and Exchange Board of India (Sebi) in its 46-page show cause notice outlining suspected violations of Indian regulations, failed to name Kotak Mahindra Bank (KMB) and, instead, masked the ‘Kotak’ name with the acronym ‘KMIL’.

Hindenburg says that KMB, one of India’s largest banks and brokerage firms founded by Uday Kotak, created and oversaw an offshore fund structure. This fund was used by an investor partner of Hindenburg to bet against Adani or short-selling Adani stocks. It accuses Sebi of protecting powerful Indian businessman.

“Uday Kotak, founder of the bank, personally led Sebi’s 2017 Committee on Corporate Governance. We suspect Sebi’s lack of mention of Kotak or any other Kotak board member may be meant to protect yet another powerful Indian businessman from the prospect of scrutiny, a role Sebi seems to embrace,” Hindenburg adds.

Short-selling of Adani stocks and Kotak fund

Sebi’s show cause notice to Hindenburg accused it of short-selling Adani stocks before making its investigative report public on January 25, 2023. The report, which raised questions about the financial health of the Adani Group, coincided with the follow-on-offer  (FPO) of Adani Enterprises. The Hindenburg report triggered a massive sell-off in all Adani listed stocks, consequently leading to a withdrawal of its FPO worth Rs 20,000 crore, a day after it had successfully closed the offer.

Sebi’s initial analysis of trading data showed that before the release of the Hindenburg report, one entity named K India Opportunities Fund (KIOF Class F) opened a trading account. The fund started trading in Adani Enterprises stocks (only in the futures segment at NSE) before publication of the report and then squared-off its entire position once the Hindenburg report was made public. According to Sebi’s calculations, KIOF made a profit of Rs 183.24 crore or $22.25 million in this specific trade.

During the investigation, it was observed that KIOF Class F was registered as a category 1 (CAT1) FPI (foreign portfolio investor) on March 4, 2022. “It had no subscription on the said date and its beneficial owner by control was IQ EQ Trustees (Mauritius), a management trust. Further, its administrator was IQ EQ Fund Services (Mauritius). The KIOF Class F appeared, at that time, to be a shell entity with no participating redeemable shareholders or economic participation by any investors,” Sebi says in the show cause notice.

However, KMB has denied any involvement with Hindenburg. “Kotak Mahindra International Limited and KIOF unequivocally state that Hindenburg has never been a client of the firm nor has it ever been an investor in the fund,” says a spokesperson of Kotak Mahindra International (KMIL) in a press statement.

The statement adds that KIOF was never aware that Hindenburg was a partner of any of its investors. “KMIL has also received a confirmation and declaration from the Fund’s investor that its investments were made as a principal and not on behalf of any other person,” it says.

The spokesperson says that KIOF is a Sebi-registered FPI and is regulated by the financial services commission of Mauritius. “The fund was established in 2013 to enable foreign clients to invest in India. The Fund follows due KYC procedures while onboarding clients and all its investments are made in accordance with all applicable laws. We have cooperated with regulators in relation to our operations and continue to do so,” it adds.

A man walks past the Securities and Exchange Board of India (SEBI) headquarters in Mumbai, India. Image: Reuters/Francis Mascarenhas/File Photo

Hindenburg’s Sebi show cause notice

Calling the Sebi’s show cause notice “nonsense, concocted to serve a pre-ordained purpose”, Hindenburg says it is an attempt to silence and intimidate those who expose corruption and fraud perpetrated by the most powerful individuals in India. “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,” it says.

Hindenburg further clarifies that Sebi took issue with its disclaimer that “fairly” described “how we were short Adani—through a deal with an investor partner who was indirectly short Adani derivatives through a non-Indian, offshore fund structure”.

It has accused the Indian market regulator of being more interested in pursuing those who expose such practices. “One might think that a securities regulator would be interested in meaningfully pursuing the parties that ran a secret offshore shell empire engaging in billions of dollars of undisclosed related party transactions through public companies while propping up its stocks through undisclosed share ownership via a network of sham investment entities,” it says.

Hindenburg further says that court documents showed that Sebi had conveniently “drawn a blank” and that further enquiry could be a “journey without a destination”, underscoring its inability or unwillingness to investigate serious allegations against Adani.

The Hindenburg report had also led to further probes on Adani Enterprises in India, which included the Supreme Court constituting an expert committee; the committee’s report was made public in May. The expert committee had not found any regulatory failure. “The committee’s report not only observed that the mitigating measures undertaken by your company helped rebuild confidence but also cited that there were credible charges of targeted destabilisation of the Indian markets. It also confirmed the quality of our group’s disclosures and found no instance of any breach,” Adani told shareholders in July last year.

Hindenburg is in the process of filing a Right to Information (RTI) seeking the names of Sebi employees who worked on both the Adani matter and the Hindenburg matter, along with basic details on meetings and calls between Sebi and Adani and its various representatives. “We will await Sebi’s response on whether it will provide basic transparency on its investigations,” it reiterates.

The research firm has made $4.1 million in gross revenue through gains related to Adani shorts from that investor relationship. “We made just $31,000 through our own short of Adani US bonds held into the report. (It was a tiny position.),” says Hindenburg. It adds that net of legal and research expenses (including time, salaries/compensation, and costs for a two-year global investigation) it may come out ahead of breakeven on our Adani short.