Kotak twist to Adani-Hindenburg saga: What the short seller said on SEBI show cause notice

Slapped with a show cause notice by SEBI for suspected violation of regulations through its bets against Adani Group stocks, activist-short seller Hindenburg Research on Tuesday issued a statement that dragged Kotak Mahindra Group into the controversy.

Hindenburg, which released a damning report in January 2023 accusing the Adani Group of stock manipulation, said one of its investor partner used an offshore fund created by Kotak Bank to bet against the conglomerate's stocks.

Hindenburg did not name the investor partner in its statement. The US-based short seller claimed that it had, itself, made only $4 million through "gains related to Adani shorts from that investor relationship" and just $31,000 through its short position of the conglomerate's US bonds.

Notably, Hindenburg had alleged "brazen stock manipulation and accounting fraud scheme over the course of decades" in its damning report, which led to the hammering of Adani stocks. The conglomerate cumulatively lost $150 billion in market value at one point.

Kotak Bank gets dragged into row

Calling the Securities and Exchange Board of India's (SEBI) show cause notice as attempted intimidation, Hindenburg asked why the market regulator did not name Kotak.

SEBI's 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", Hindenburg said.

Instead the regulator simply named the K-India Opportunities fund and "masked the 'Kotak' name with the acronym 'KMIL'," it added.

KMIL refers to Kotak Mahindra Investments Ltd, an asset management company.

SEBI did not immediately offer any comments on the Hindenburg claims.

Meanwhile, the shares of Kotak Mahindra Bank declined 2.49% to settle at ₹1,763.15 apiece on the NSE.

Kotak issues clarification

Hours after the controversy erupted, Kotak Mahindra Group issued a statement, clarifying that Hindenburg was never a client of its K-India Opportunities fund and KMIL. The fund was not aware that the short seller is a partner of one of its investors, it added.

"KMIL and KIOF unequivocally state that Hindenburg has never been a client of the firm, nor has it ever been an investor in the Fund. The Fund was never aware that Hindenburg was a partner of any of its investors," a KMIL spokesperson was reported as saying.

The spokesperson further noted that K-India Opportunities fund is registered with the SEBI, and remains regulated by the Financial Services Commission of Mauritius.

The fund was established in 2013 to enable foreign clients to invest in India, and follows due KYC procedures while onboarding clients, the statement added. "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."

Hindenburg calls SEBI notice 'nonsense'

Hindenburg termed the SEBI show cause notice as "nonsense" and "concocted to serve a pre-ordained purpose: an attempt to silence and intimidate those who expose corruption and fraud perpetrated by the most powerful individuals in India."

"After 1.5 years Of investigation, SEBI identified zero factual inaccuracies with our Adani research. Instead, the regulator took issue with things like our use of the word 'scandal' when describing multiple prior instances of Adani promoters being charged with fraud by Indian regulators, and our quoting of an individual that alleged SEBI is corrupt and works 'hand in glove' with conglomerates like Adani to help it skirt regulations," it said.

The US firm said the show cause notice does resolve some questions: "Did Hindenburg work with dozens of firms to short Adani, making hundreds of millions of dollars? No - We had one investor partner, and net of costs we may barely come out above breakeven on our Adani short.

"Our work on Adani was never justifiable from a financial or personal safety perspective, but it is by far the work we are most proud of," it said. "To this day, Adani has still failed to address the allegations in our report, instead providing a response that ignored every key issue we raised and has offered blanket denials of subsequent media allegations," it said, adding that its January 2023 report had "provided evidence of a vast network of offshore shell entities controlled by (group chairman) Gautam Adani's brother, Vinod Adani, and close associates."

"We detailed how billions were surreptitiously moved through these entities, into and out of Adani public and private entities, often without related-party disclosures," it said.

After the Hindenburg statement was out, shares of Adani Enterprises, the flagship entity of the ports-to-power conglomerate, edged lower. The stock settled at ₹3,150 apiece on the NSE, down 1.06%.