MUMBAI: Sebi has issued a show-cause notice to Hindenburg, asking why it should not act against the short-seller for violating norms related to the “prohibition of fraudulent and unfair trading practices in the securities market”.
The notice, dated June 26, was released online by Hindenburg, which took a defiant stand, charging Sebi with not acting on allegations in its Adani report. Hindenburg described the notice as “nonsense” and “nebulous” and alleged attempts to silence the firm. Hindenburg claimed it only made $4 million from the operation, which resulted in a $153 billion drop in Adani group’s valuation.
In a statement, Hindenburg said: “Sebi has neglected its responsibility, seemingly doing more to protect those perpetrating fraud than to protect the investors being victimised by it.”
The thrust of Sebi’s notice is that the research firm colluded with its investor partner, misled the public, and used non-public information to manipulate prices and profit from its action. Sebi has alleged that the partner, Kingdon Capital, knew about Hindenburg’s research on Adani group before the report was made public and there was a profit-sharing agreement between the two. As per Sebi, Kingdon agreed to share 30% of its net profits from trading securities related to Adani with Hindenburg in exchange for receiving the report two months in advance.
In a fresh twist in the Hindenburg saga, the US short seller said that Kotak Mahindra International created the offshore fund structure used by its investor partner Kingdon Capital to short Adani stocks before its report was published in Jan 2023.
Kotak Mahindra Bank informed stock exchanges late on Tuesday that Sebi’s showcause notice to Hindenburg and Kingdon included a fund managed by Kotak Mahindra International (KMIL).
“KMIL was informed by Kingdon that the transactions were made on a principal basis, i.e. for themselves. Kingdon never disclosed that they had any relationship with Hindenburg nor that they were acting on the basis of any price sensitive information. In fact, they had expressly confirmed that any advice from Kingdon to invest would be basis purely public information,” Kotak Bank’s statement said.
“Neither the fund nor KMIL were aware that Kingdon entities had any association with Hindenburg. The fund and KMIL had no prior knowledge of the publication of the aforesaid Hindenburg report. We deny any allegation of being aware of such report or acting in collusion in any manner with Kingdon or Hindenburg,” it said.
Earlier in the day, Kotak Bank shares dropped 2.4% after Hindenburg disclosed Sebi’s notice and said that a Kotak fund was one of the noticees for setting up the offshore structure. In its exchange communication, Kotak said that the showcause notice dated June 26 was received by KMIL on July 2.
In its reply to Sebi’s showcause notice, Hindenburg questioned the regulator for not highlighting the name of Kotak, the group that facilitated offshore investors’ short-selling in Indian markets.
By bringing Kotak into the picture in correspondence with Sebi, Hindenburg has sought to support its claim that the firm played by the rules while short-selling and did not cross a line between using proprietary research based on public information and “use of advance knowledge of non-public information” for trading, as the regulator alleged.
Hindenburg reply also referred to Kotak group founder, Uday Kotak’s chairmanship of 2017 Committee on Corporate Governance to bolster the legitimacy of its actions.
“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 said.
In a statement, a Kotak group spokesperson said, “KIOF (K India Opportunities Fund – a Sebi-registered FPI regulated by Financial Services Commission of Mauritius), was established in 2013 to enable foreign clients to invest in India. The fund follows due KYC procedures while on-boarding 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.”
The statement also denied any knowledge of investors’ association with Hindenburg. “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 spokesperson said.
