How Kotak fund provided Kingdon Capital fast-track access to short-sell Adani stocks through a ‘shell’ entity in Mauritius

How Kotak fund provided Kingdon Capital fast-track access to short-sell Adani stocks through a ‘shell’ entity in Mauritius

Kingdon Capital, a New York-based family office accused by Sebi of short-selling Adani Enterprises Ltd shares, gained expedited access to India’s derivatives market, enabling it to take short positions before the public release of the Hindenburg Research report in January 2024.

Instead of obtaining a fresh foreign portfolio investor (FPI) licence, which would have taken Kingdon Capital at least a month, a Kotak Mahindra Bank subsidiary offered Kingdon a readymade structure in Mauritius, which had already been registered as an FPI with Sebi since March 2022.

This ensured Kingdon was able to access India’s short-selling market within 10 days of initiating the process. According to Sebi’s June 2024 show-cause notice to Hindenburg, Kingdon took control of the entity registered as an FPI in late December 2022.

Timeline of the events according to Sebi notice

In 2022, obtaining an FPI license took at least a month due to the requirement that investors submit documents, including know-your-customer (KYC) details and information on ultimate beneficial ownership. Further, some documents needed notarisation or registration in a foreign jurisdiction before submission. Thereafter, custodian banks verified the documents and ascertained their authenticity, experts said.

By utilising an existing structure, Kingdon Capital expedited the FPI licensing process to just 10 days, the show-cause notice issued by SEBI to Hindenburg Research showed.

Emails sent to spokespeople for Sebi and Kotak Mahindra Bank remained unanswered. Kingdon Capital declined to comment on the matter.

Kingdon’s decision to take over an existing entity instead of applying for a fresh license appears to have ensured the fund was well-placed in terms of short positions before the Hindenburg report was published, market insiders said.

Kingdon had prior access to the Hindenburg report due to a pre-arrangement between them. The Mauritius structure also ensured a layer of separation between Kingdon entities and the trade so that in case of any legal consequences, the liabilities of the ultimate entity could be limited, said a leading lawyer who advises FPIs.

Kingdon started taking short positions from January 10, 2023, and by the time Hindenburg published its report on January 25, 2023, it had a short position for 8.5 lakh shares of Adani Enterprises. Sebi accused Kingdon of making Rs 183 crore of profit on these trades.

FPI registered six months before Kingdon took over

According to Sebi’s show cause notice to Hindenburg – which the short seller made public on Tuesday - K India Opportunities Fund- Class F was registered as an FPI with Sebi on March 4, 2022.

“It had no subscription on the said date and its beneficial owner by control was IQ EQ Trustees(Mauritius) Ltd. The KIOF Class F appeared, at that time, to be a shell entity with no Participating Reedemable Shareholders or economic participation by any investors.” Sebi had said in the show cause notice dated June 26, 2024.

Kingdon started subscribing to the FPI’s shares on December 28, 2022 and the takeover was completed on December 30, 2022, according to the show cause notice.

Normally, restructuring of funds, including mergers, demergers and takeovers, comes to the notice of Sebi and exchanges since the beneficial owner of the shares owned by the FPI undergoes a change. “In fact, in most cases, these FPI restructurings need the permission of Sebi since they often involve the inter-se transfer of shares,” said another person cited above. “But in this case, since KIOF did not own any shares or have any beneficial owners by economic interest, the ownership was transferred easily.”

This saga prompted Sebi to tighten the reporting norms for FPIs. Under the new rules, Sebi needs to be notified in a timely manner of any changes to the fund’s ownership. Although Hindenburg made the notice public this week, Sebi has been probing the trades since last year.

K Funds is a popular franchise with 13 classes of funds registered as FPIs with Sebi. Since the short positions were being taken under the name of K-Funds, it did not draw any attention from exchanges and other market institutions. To be sure, Kingdon capital has submitted all the documents required under the Sebi rules for FPI license while it took over K-Funds. However, in the larger market ecosystem it wasn’t known, said a broker who works with FPIs.

Kotak Mahindra group on Tuesday issued a statement declining any prior knowledge about links between Kingdon and Hindenburg.