The US-based short seller Hindenburg Research shared an early access copy of its report against the Adani Group of companies with the New York-based hedge fund manager Mark Kingdon, two months before publishing it which resulted in profiting from a deal from the share price movement, as per apex securities market regulator of India,.
The Securities and Exchanges Board of India (SEBI) had sent a show cause notice to Hindenburg Research for making ‘unfair’ profits from ‘collusion’ to use insider and ‘misleading’ information to induce mass ‘panic selling’ in the Adani Group of stocks.
SEBI has questioned as to how the short seller, by its action, benefitted the New York-based hedge fund and a broker tied to Kotak Mahindra Bank from the over $150 billion slump in the market value of the 10 listed Adani Group companies after the original report was released.
Hindenburg’s has said that the SEBI action is an attempt to silence and intimidate those exposing corruption and fraud conducted by the most powerful people in India. The short seller also revealed that the vehicle which was used to bet against Adani’s top firm Adani Enterprises Limited belonged to Kotak Mahindra (International) Limited (KMIL), a Mauritius-based subsidiary of Kotak Mahindra Bank Limited.
It placed its bets against the top Adani firm for its client Kingdon Capital Management, a.k.a. Mark Kingdon. The SEBI notice also disclosed the exact timestamped chats between an employee of the hedge fund and KMIL traders for selling future contracts of Adani Enterprises.
Kingdon “never disclosed that they had any relationship with Hindenburg nor that they were acting on the basis of any price-sensitive information,” said Kotak Mahindra Bank.
In 2023, SEBI told a Supreme Court-appointed panel that it was investigating 13 opaque offshore companies that held 14-20 per cent of the stocks in the Adani Group. SEBI sent notices to Hindenburg, KMIL, Kingdon and Nathan Anderson, founder of Hindenburg Research.
The SEBI letter said Kingdon had a controlling stake in KMIL’s K-India Opportunities Fund, and it had an agreement to share 30 per cent profits made from the securities trade with Hindenburg. On top of this was a cut of 25 per cent cause of extra time and effort needed to reroute the trades through the K-India Fund.
Kingdon transferred $43 million into segments to take short positions in Adani Enterprises, said SEBI in the letter. The short position was for 8.5 lakh shares ahead of the Adani report release pre-market hours on January 25th, 2023, according to the market regulator.
“Prior to the release of the Hindenburg Report, concentration in short-selling activity was observed in the derivatives of Adani Enterprises Ltd,” said SEBI. Since the release of the report, Adani Enterprises shares fell nearly 59 per cent from January 24 to February 22, 2023. The share price fell to ₹1,404 from ₹3,422 per share.
SEBI also said the K-India Opportunities Fund Ltd – Class F (KIOF Class F) opened a trading account and began trading in the scrip of Adani Enterprises a few days before the report was published. It squared off its short positions after the report was out. They made a total profit of ₹183.23 crore or $22.25 million.
“The net profit after trading and legal expenses comes to USD 22.11 million,” said Sebi.
As a part of the deal, Kingdom owed $5.5 million to Hindenburg, out of which $4.1 million has already been paid, as of June 1st, said SEBI in the notice.
Kingdon Capital said it had a legal option that it could enter into a research services agreement with a third-party firm that publicly releases short reports on companies, according to which Kingdon Capital would be given a draft copy of the report before release, giving them the option to invest before the report is made public.
A SEBI show cause notice is usually given before taking any legal action on any entity which may involve a financial penalty and even a ban from trading in Indian financial markets. SEBI with the help of the Indian government can also geo-block the research firm’s website.
SEBI has given the short seller 21 days to give an official response to its allegations.
Hindenburg said it made $4.1 million from its declared positions on Adani Group stocks and also criticised the market regulator for ignoring the “evidence” provided in the January 2023 report, and not conducting any investigation. The report alleged that the Adani conglomerate had a huge network of offshore shell companies which is used to move billions of dollars in and out of the Adani Group of private and public companies.
The short seller also said SEBI apart from trying to claim jurisdiction over a US-based investor, had failed to name the actual company tied to the Indian entity Kotak Mahindra Bank. The regulator hid the name of the Kotak subsidiary with an acronym “KMIL”.
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