New Delhi: US-based short-selling firm Hindenburg Research has claimed it used a fund created by Kotak Mahindra Bank to short Adani Group stocks. This development follows the receipt of a 46-page ‘show cause notice’ from the Securities and Exchange Board of India (SEBI), which alleges that Hindenburg's January 2023 report on Adani Group contained misrepresentations and inaccuracies meant to mislead readers.

Hindenburg’s Response to SEBI’s Notice

Hindenburg, responding to the notice received on June 27, stated that SEBI's actions were an attempt to silence and intimidate those exposing corruption and fraud. The firm argued that SEBI has no jurisdiction over it, as it is a US-based research firm with no Indian entities, employees, consultants, or operations. Hindenburg also pointed out that SEBI did not name Kotak Bank, referring instead to the K-India Opportunities Fund (KMIL) to mask the connection.

Accusations Involving Kotak Mahindra Bank

Hindenburg accused Kotak Mahindra Bank of creating and managing the offshore fund structure used to short Adani group shares. The firm noted that SEBI’s omission of Kotak Bank's name might be to protect another powerful Indian businessman from scrutiny. Hindenburg emphasized that their short position in Adani was disclosed openly and repeatedly.

SEBI’s Show-Cause Notice Details

The SEBI notice mentioned that Hindenburg’s report disclaimers were misleading and that the firm indirectly participated in the Indian securities market. SEBI described how Kingdon Capital Management, a client of Hindenburg, took a short position on Adani Enterprises futures based on a draft of the Hindenburg report before its public release. The notice noted that the short position was squared off post-publication, yielding a significant profit of $22.25 million.

Hindenburg’s Financial Gains

Hindenburg revealed that it saw gains of just over $4 million from the short-selling episode, which led to a massive market erosion of around $150 billion in Adani Group’s market valuation. The firm disclosed gross revenue of about $4.1 million through gains related to Adani shorts from one investor relationship and approximately $31,000 from its own short of Adani US bonds.

Kotak Bank’s Denial

In response, Kotak Mahindra International Limited denied Hindenburg's claims, stating that the short-seller had never invested in the K-India Opportunities Fund. Kotak asserted that it was unaware of any partnership between Hindenburg and its investors.

Supreme Court’s Involvement

The Supreme Court of India ordered SEBI to investigate the allegations made in the Hindenburg report and established an expert panel to look into potential regulatory lapses. However, the Supreme Court later refused to order a Special Investigation Team (SIT) probe, noting that third-party reports without verification cannot be relied upon as proof. The court directed SEBI to conclude its investigations into the remaining cases within three months.

The ongoing controversy highlights the tensions between Hindenburg Research, SEBI, and Kotak Mahindra Bank. As the investigation progresses, the financial community and stakeholders are keenly observing the developments and their implications for market integrity and regulatory oversight in India.

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