U.S. short-seller Hindenburg Research had shared an advance copy of its damning report against the Adani Group with New York-based hedge fund manager Mark Kingdon about two months before publishing it and profited from a deal to share spoils from share price movement, according to market regulator SEBI.

The Securities and Exchange Board of India (SEBI), in its 46-page show-cause notice to Hindenburg, detailed how the U.S. short seller, the New York hedge fund and a broker tied to Kotak Mahindra Bank benefited from the over ₹150 billion routs in the market value of Adani Group’s 10 listed firms post-publication of the report.

The SEBI charged Hindenburg with making “unfair” profits from “collusion” to use “non-public” and “misleading” information and induce “panic selling” in Adani Group stocks.

Hindenburg, which made public the SEBI notice, in its response, has described the show-cause as an attempt to “silence and intimidate those who expose corruption and fraud perpetrated by the most powerful individuals in India” and revealed that the vehicle used to bet against Adani’s flagship firm Adani Enterprises Ltd belonged to Kotak Mahindra (International) Ltd, a Mauritius-based subsidiary of Kotak Mahindra Bank Ltd. (KMIL).

KMIL’s fund placed bets on Adani Enterprises Ltd for its client Kingdon’s Kingdon Capital Management.

The SEBI notice includes extracts of time-stamped chats between an employee of the hedge fund and KMIL traders for selling future contracts in AEL.

Kotak Mahindra Bank has stated that Kingdon “never disclosed that they had any relationship with Hindenburg nor that they were acting on the basis of any price-sensitive information”.

SEBI — which last year told a Supreme Court-appointed panel that it was investigating 13 opaque offshore entities that held between 14% and 20% across five publicly traded stocks of the Adani Group — has sent notices not just to Hindenburg but also to KMIL, Kingdon and Hindenburg founder Nathan Anderson.

Lawyer’s claim

Senior lawyer Mahesh Jethmalani, who had in the past spoken for the Adani Group, in a post on X claimed that Kingdon had a Chinese link. Kingdon is married to “Chinese spy” Anla Cheng, he claimed.

“Accomplished Chinese spy Anla Cheng, who along with her husband Mark Kingdon, hired Hindenburg for a research report on Adani, engaged the services of Kotak to facilitate a trading account to short sell Adani shares; made millions of dollars from their short selling; eroded Adani market cap enormously,” he alleged.

Kingdon, which had a controlling stake in KMIL’s K-India Opportunities Fund Ltd, had a pact to share with Hindenburg 30% of profit made from trading in securities based on the report, the SEBI letter said, adding this profit share was cut to 25% due to the extra time and effort needed to reroute trades via the K India fund.

The market regulator said Kingdon transferred ₹43 million in two tranches to build short positions in AEL. The K India fund built short positions for 8,50,000 shares ahead of the report release and squared off these positions soon after the report was released.

According to SEBI, Hindenburg published a report titled ‘Adani Group: How the World’s 3rd Richest Man is Pulling The Largest Con in Corporate History’ on January 24, 2023 (United States time – January 25, 2023, according to IST) during pre-market hours.

Fall in price

“Prior to the release of the Hindenburg Report, concentration in short-selling activity was observed in the derivatives of Adani Enterprises Ltd,” it said. “Pursuant to the release of the said report, the price of AEL fell by around 59% during the period from January 24, 2023 to February 22, 2023” — from ₹3,422 to ₹14,04.85 per share.

SEBI said K India Opportunities Fund Ltd – Class F (KIOF Class F) opened a trading account and started trading in the scrip of AEL just a few days prior to the publication of the report and then squared off its entire short position post-publication of the Hindenburg Report, making significant profits of ₹183.23 crore (₹22.25 million).

“The net profit after trading and legal expenses comes to ₹22.11 million,” SEBI said.

As part of the deal, Kingdon owed Hindenburg ₹5.5 million, of which ₹4.1 million had been paid as of June 1, the notice said.

In its response to SEBI, Kingdon Capital said it had got legal option that it could “enter into a research services agreement with a third-party firm that publicly releases short reports on companies, pursuant to which Kingdon Capital would be given a draft copy of the report before it is made publicly available and would have the opportunity to accordingly made investments before the report’s public dissemination”.

A show-cause notice is often a precursor to formal legal action that may include imposing financial penalties and barring participation in the Indian capital market. SEBI can also seek government help to geoblock the research firm’s website.

21 days’ time

SEBI has given Hindenburg 21 days to respond to its allegations.

Hindenburg, which published the SEBI notice on its website, in its response stated that it made just ₹4.1 million from its declared positions on Adani stocks and criticised the regulator for not focusing its investigation into the January 2023 report “providing evidence” of the conglomerate creating “a vast network of offshore shell entities” and moving billions of dollars “surreptitiously” into and out of Adani public and private entities.

It said that while SEBI was seeking to claim jurisdiction over a U.S.-based investor, the regulator’s notice “conspicuously failed to name the party that has an actual tie to India: Kotak Bank,” which created and oversaw the offshore fund structure used by Hindenburg’s investor partner to bet against Adani.

The regulator “masked the “Kotak” name with the acronym “KMIL”, it added.

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

File picture
| Photo Credit: Reuters

Kotak Mahindra International Limited said on Tuesday that U.S. short-seller Hindenburg Research has never been an investor in the K-India Opportunities Fund.

Kotak was responding to allegations that Hindenburg colluded with its client Kingdon Capital Management and used a Kotak group offshore fund to short Adani group shares last year.

“The Fund was never aware that Hindenburg was a partner of any of its investors,” Kotak said in a media statement.

It added that investments were made in the fund by its investors and not on behalf of any other person.

Kotak further said that it is cooperating with India markets regulator.

Jairam Ramesh. File
| Photo Credit: ANI

The Congress on October 19 urged the Securities and Exchange Board of India (SEBI) to stand firm and finish its investigation into the Adani matter in a timely manner, even as it reiterated that only a JPC probe can investigate the full scope of the issue.

In a post on X, Congress general secretary Jairam Ramesh cited a media report which claimed that the SEBI has asked the Organized Crime and Corruption Reporting Project (OCCRP) to give it access to key documents about the allegations of stock manipulation and accounting fraud against the Adani Group.

“Recently, the Organised Crime & Corruption Reporting Project (OCCRP) found clinching evidence that Adani associates were controlling opaque shell companies in overseas tax havens that had amassed huge stakes in Adani Group companies. All this was done in blatant violation of SEBI regulations,” Mr. Ramesh said. “Major global papers such as the Financial Times and the Guardian covered the story in detail,” he pointed out.

“The Adani Group and its minions in the BJP attempted to discredit OCCRP as ‘Soros-funded interests’. Now, it emerges that SEBI itself had approached OCCRP to get access to the documents proving that Adani was in fact indulging in round-tripping and money-laundering benami funds,” Mr. Ramesh said. “Will Adani apologists attack SEBI as conspiring with Soros? Does this not prove that SEBI is finally taking these disclosures seriously and attempting to fulfill its duty to the nation,” he said.

“We urge SEBI to stand firm and finish its investigation in a timely manner. However, we reiterate that only a JPC can investigate the full scope of the Adani MegaScam, including the close and enduring relationship, financial or otherwise, between the PM and his friend Adani,” Mr. Ramesh said.

The Opposition party has been questioning the financial dealings of billionaire Gautam Adani’s Group after the U.S. research firm Hindenburg alleged “irregularities” and charged it with stock price manipulation.

The Adani Group has denied all the allegations made in the Hindenburg report and claimed there had been no wrongdoing on its part.

Senior Congress leader Jairam Ramesh. File
| Photo Credit: The Hindu

The Congress on September 14 alleged that the “Adani scam” has exposed the role tax havens play in hiding large-scale violation of Indian laws and said the issue should have been discussed at the recent G20 Summit.

It also said that if a Joint Parliamentary Committee (JPC) probe is ordered into the allegations against the Adani Group, it will have to make sure that any loopholes for round-tripping and money-laundering are effectively shut.

In a post on X, Congress general secretary Jairam Ramesh said the rise in Indian outward direct investment in the past 25 years has been a sign of deepening globalisation.

“However, it is disturbing that offshore tax havens such as Bermuda, Jersey and Cyprus rank among the top 10 destinations for Indian investment, according to the RBI,” he said.

“This is in addition to Mauritius that has long been suspected as a preferred destination for Indian money-laundering and round-tripping,” the Congress leader noted.

“The Adani MegaScam has exposed the critical role such tax havens play in hiding the large-scale violation of Indian laws and regulations. These violations are hollowing out our economy and affecting the credibility of our stock markets,” Mr. Ramesh said.

“The G20 was the right forum to take up this issue and ensure concrete action against tax havens. But the Prime Minister was busy projecting his own image rather than protecting India’s interests,” he claimed.

“A JPC into the Adani MegaScam will have to make sure that any remaining loopholes for round-tripping and money-laundering are effectively shut,” the Congress leader said.

The Congress and other Opposition parties have been demanding a JPC probe into the Adani issue and will take up the issue during the upcoming special session of Parliament from September 18 to 22.

U.S. short-seller Hindenburg Research, in a report released on January 24, alleged accounting fraud, stock price manipulation and use of tax havens by the Adani Group, triggering a stock market rout. The Adani Group has denied all allegations by Hindenburg.

Adani Group Chairman Gautam Adani addresses during the Annual General Meeting (AGM) of his group companies, on Tuesday, July 18, 2023.
| Photo Credit: PTI

Gautam Adani on Tuesday said that the U.S.-based short seller Hindenburg Research’s report on the group was a deliberate, malicious attempt at damaging the group’s reputation and generate profit by driving down its stocks in the short term.

He described the report as a mix of targeted misinformation and discredited allegations written by vested interests. He said this while addressing the Annual General Meeting of the group firms in Ahmedabad.

“The report was a combination of targeted misinformation and discredited allegations, the majority of them dating from 2004 to 2015,” he said in his speech.

After the damning report by the short seller that raised questions about the group’s finances and accused it of accounting fraud, the group has reportedly questioned the timing and motive of the report.

Earlier in a 400 page rebuttal, the group had dubbed the report as an “attack on India.”

In his speech, Mr. Adani said the group raised finances from the international markets and no credit agency internationally cut any ratings of the group.