Unraveling the Adani-Hindenburg-Kotak Knot

A twist in the tale...

India's stock market regulator, SEBI, sent a 46-page show cause notice to Hindenburg Research for exposing Adani Group's alleged wrongdoings.

No no, we are in our full senses, its Hindenburg who received the notice instead of Adani Enterprises and Hindenburg has responded by criticizing SEBI for allegedly neglecting its responsibilities and protecting those accused of fraud rather than investors.

For those under a rock, here is some background into the matter:

Hindenburg Research had in January 2023 published a report accusing Adani group companies of stock manipulation and accounting fraud, ahead of a proposed ?20,000 crore share sale by Adani Enterprises Ltd.

This resulted in a $150 billion meltdown in the shares of Adani group's 10 publicly listed companies, even as the conglomerate termed the report malicious and baseless.

In January this year, in some respite to the Adani Group, India's Supreme Court ruled that the conglomerate would not face further investigations beyond Sebi's current scrutiny. The markets regulator has been probing the Adani Group for tax haven use and stock manipulation.

Wait, there is more to this...

Now there is a new party into play, which is accused of creating and overseeing an offshore fund structure used by a partner of Hindenburg to short Adani stocks. In a plot twist that no one saw coming, this party is believed by the SEBI, to be none other than legendary banker and veteran Mr. Uday Kotak and Kotak Mahindra Bank. Kotak Mahindra Bank is under scrutiny following allegations by Hindenburg Research that the bank created and oversaw an offshore fund structure used by its investor partner to short sell Adani Group shares, generating $4.1 million in revenue. This revelation has led to a 2% drop in Kotak Bank's shares.

Let's understand the structure first:

Kotak Mahindra International Limited (KMIL) is a unit of Kotak Mahindra Bank which manages the K-India Opportunities Fund Ltd i.e. Kotak India Opportunities Fund Ltd.

K-India Opportunities Fund Ltd is a Sebi-registered foreign portfolio investor regulated by the Financial Services Commission of Mauritius. The fund was established in 2013 to enable foreign clients to invest in India.

Now, Kingdon Capital Management, an investor-partner of the US short-seller Hindenburg, had invested in K-India Opportunities Fund Ltd. So that is the reason behind Hindenburg accusing SEBI of protecting Adani Enterprises and Kotak Mahindra Bank. Meanwhile, KMIL has denied any such claims of short selling Adani Group shares for Hindenburg but has acknowledged that it had facilitated the shorting of Adani shares for Kingdon Capital Management and has clarified that it has obtained a confirmation and declaration from the fund’s investor (Kingdon Capital Management) that its investments were made as a principal and not on behalf of any other person.

This news comes at a delicate time for Kotak Mahindra Bank, where it is already under scrutiny by the RBI as in April this year, RBI stopped the bank from onboarding new customers through its online and mobile banking channels and barred it from issuing fresh credit cards immediately as the central bank found deficiencies and non-compliances in the bank's IT system and its “continuous failure to comply with the RBI's corrective action plan.

In the end, what happens to Hindenburg and Kotak, only time will tell...

Meanwhile, Adani Group maintains its innocence with the resilience of a cockroach after nuclear fallout.