US short-seller Hindenburg Research shared an advance copy of its critical report on the Adani group with New York-based hedge fund manager Mark Kingdon about two months before its public release, profiting from a deal to share gains from the resulting share price movements, according to market regulator SEBI.
In a 46-page show cause notice, the Securities and Exchange Board of India (SEBI) detailed how Hindenburg, Kingdon's hedge fund, and a broker associated with Kotak Mahindra Bank benefited from the over USD 150 billion decline in the market value of Adani group's 10 listed firms post-publication of the report.
Sebi accused Hindenburg of making "unfair" profits through "collusion," using "non-public" and "misleading" information to induce "panic selling" in Adani Group stocks.
Hindenburg, which made the Sebi notice public, responded by describing the notice as an attempt to "silence and intimidate those who expose corruption and fraud perpetrated by the most powerful individuals in India." They 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's fund placed bets on Adani Enterprises Ltd for its client, Kingdon's Kingdon Capital Management.
The Sebi notice includes time-stamped chats between a hedge fund employee and KMIL traders coordinating the sale of future contracts in AEL. Kotak Mahindra Bank 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 informed a Supreme Court-appointed panel last year that it was investigating 13 opaque offshore entities holding between 14 percent and 20 percent of five publicly-traded Adani stocks, has sent notices to Hindenburg, KMIL, Kingdon, and Hindenburg founder Nathan Anderson.
Senior lawyer Mahesh Jethmalani, who has previously spoken for the Adani group, claimed on social media that Kingdon had a Chinese link, alleging that Kingdon's wife, Anla Cheng, is a "Chinese spy" who, along with Kingdon, hired Hindenburg for the Adani report, facilitated short selling via Kotak, and profited millions.
Kingdon, which had a controlling stake in KMIL's K-India Opportunities Fund Ltd, had an agreement to share 30% (later reduced to 25%) of profits from trading based on the report with Hindenburg. Sebi stated Kingdon transferred USD 43 million in two tranches to build short positions in AEL, squaring off these positions post-report, making Rs 183.23 crore (USD 22.25 million) in profit.
Hindenburg published the report on January 24, 2023, leading to a 59% drop in AEL's price by February 22, 2023. K India Opportunities Fund Ltd – Class F opened a trading account just days before the report's release and made significant profits.
Sebi stated Kingdon owed Hindenburg USD 5.5 million, with USD 4.1 million paid by June 1. Kingdon Capital justified its agreement with Hindenburg, citing legal options to enter into research service agreements with third-party firms.
A show cause notice often precedes potential formal legal actions, including financial penalties and barring participation in the Indian capital market. Sebi may also seek government help to geoblock Hindenburg's website. Hindenburg criticised Sebi for not investigating the report's evidence of Adani's alleged offshore shell entity network and money movements, and highlighted Sebi's omission of Kotak Bank's name, using "KMIL" instead.
Sebi has given Hindenburg 21 days to respond to the allegations.
With agency inputs.
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