New Delhi: The markets regulator, the Securities and Exchange Board of India (SEBI) has alleged that foreign portfolio investor Kingdon Capital Management LLC and its entities aided Hindenburg to indirectly participate in Adani Enterprises Ltd by collaborating with Hindenburg to trade in Adani Enterprise Futures in the Indian derivatives market and shared profits with the research firm.
SEBI investigation found that Hindenburg colluded with Mark Kingdon and his entities in a scheme devised to use advance knowledge of non-public information to build short positions. The scheme involved sharing of draft report, waiting for Kingdon to set up a trading account, agreeing to reduced profit-sharing and publishing report in a pre-planned manner at the time of FPO, claiming non-association with the Indian securities market, squaring off for short sale profit and creating of India fund for Adani trade.
The regulator alleged that Kingdon entered into a legal agreement with Hindenburg Research LLC to share the draft report in advance with the foreign investor, before it was officially released on January 24, 2023.
SEBI Show Cause Notice
SEBI has issued a show cause notice to Hindenburg Research LLC, and its sole beneficial owner, Nathan Anderson, along with Mark Kingdon who is the Ultimate Beneficial Owner of Mauritius-based entities for trading violations in the scrip of Adani Enterprises, leading up to Hindenburg Report and thereafter.
The regulator has alleged that Hindenburg and Anderson have violated regulations under the SEBI Act, SEBI's Prevention of Fraudulent and Unfair Trade Practices regulations, and SEBI's Code of Conduct for Research Analyst regulations.
FPI Kingdon has allegedly violated the SEBI Act, SEBI's Prevention of Fraudulent and Unfair Trade Practices regulations, and SEBI's Code of Conduct for Foreign Portfolio Investors.
Kotak-Hindenburg Conspired Together
SEBI's investigation also exposed that Kotak Mahindra and Hindenburg conspired together to take short positions in Adani shares. Hindenburg agreed to take a 25 per cent profit cut from shorting, resulting in millions of dollars in profit. Chats from Kotak Mahindra bank executives, mentioned by SEBI in their show cause notice, reveal how Kotak set up offshore funds to route money and take short positions in Adani futures, generating profits of $22.11 million.
According to the show cause notice, SEBI has alleged that prior to the report release, short selling activity was seen in the futures of Adani Enterprises, and after the report, the share lost 59 per cent between January 24, 2023, and February 22, 2023. Adani Enterprises was in the midst of a follow-on public offer when the Hindenburg report was released. The FPO was subsequently withdrawn by the Adani group in the interest of shareholders.
The SEBI investigation revealed that K-India Opportunities Fund - Class F (KIOF) opened a trading account and started trading in the scrip of Adani Enterprises before the release of the report and squared off the positions in February making a profit of $22.25 million or Rs 183.24 crore. This fund only traded Adani Enterprises on the NSE.
Kotak Statement
Kotak Mahindra International Ltd (KMIL) spokesperson in a statement today said 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."
"KMIL has also received a confirmation and declaration from the Fund's investor that its investments were made as a principal and not on behalf of any other person," the spokesperson said.
KMIL said the Fund follows due KYC (know your customer) procedures while onboarding clients and all its investments are made in accordance with all applicable laws.
Hindenburg in its response has alleged that Kotak Mahindra Investment Ltd had created and oversaw the offshore fund structure used by Kingdon to bet against Adani. The market regulator in its show cause notice said Kotak entered into an investment advisory agreement on January 5, 2023, between KMIL and Kingdon Capital which showed urgency in a hurry to create the trading account. Kingdon Capital made all trading decisions for the FPI.
SEBI has claimed that the US-based short seller shared the draft of the report with Kingdon in November 2022. The draft was "substantially the same" as the final report. SEBI's show cause notice exposes how Hindenburg's report was full of conjectures, lies, and misrepresentations, with the sole intention of maximising profits from their short positions.
Instead of addressing SEBI's investigation, which is based on documents and proof obtained from US courts and SEC records, Hindenburg has started attacking SEBI, calling them biased.
SEBI alleges that Kingdon took legal confirmation before entering into a research services agreement with Hindenburg pursuant to which it received the draft report used to make investment before the report was made public.
Kingdon Capital as per the research agreement agreed to share 25 per cent of the profit share instead of 30 per cent, as agreed in the Research report. The decline in profit shares was due to cost, structure, and time taken to set up the structure of the KIOF trading account, to short-sell shares of Adani Enterprises in India.
Kingdon's Master Fund after setting up the KIOF account and receiving the draft report transferred $40 million to a trading account of KIOF and converted $18 million in Indian rupees to the margin account for trading. The trading account was activated on January 10 to build up short positions in the Adani Enterprise Futures.
How Fund Made Profits
The fund took short positions of 850,000 shares by January 20 and accounted for as much as 7.01 per cent of the total Open Interest position before the report was published. The fund further rolled over the positions to February futures, before the release of the report and squared off the positions between February 1 to February 22 to make a profit of Rs 183.24 crore.
Kingdon was required to share $5.52 million in profit with Hindenburg but paid $2.7 million and $1.38 million to Hindenburg on March 31, 2023, and June 1, 2023, pursuant to invoices raised by the US short seller. It held back $1.38 million as it continued to have investment in K India Opportunities Fund. The balance was to be paid once the fund was withdrawn.
SEBI said that details received from Interactive Broker LLC via the US Securities and Exchange Commission revealed that Hindenburg traded in bond of the Adani group outside India. It traded in the bonds of Adani Electricity Mumbai, Adani Green Energy, Adani Ports, and SEZ between November 2022 and March 2023. It was observed that Hindenburg made an overall loss of $5,197 from trading in the bonds. The US-based short seller also took positions in the ETF and MSCI India Index on January 24, 2023. These positions were eventually squared off after the release of the report between January and March 2023 making a profit of around $9.2 million.
SEBI in its show cause notice said the Hindenburg report contained certain misrepresentations and inaccurate statements which built a convenient narrative through selective disclosures, and catchy headlines to cause panic in Adani share prices thereby deflating the prices of the Adani group stocks. Hindenburg has claimed that it did not provide research notice to Kingdon prior to sharing the draft report and Kingdon did not share the trading notice with Hindenburg before the report was shared publicly through mass email.
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