The commission described the Securities and Exchange Board of India’s notice dated June 26 as “concocted nonsense for a pre-determined purpose and an attempt to silence and intimidate those exposing corruption and fraud perpetrated by some of the most powerful people in India.”Apart from the investigation firm, notices were also sent to its founder Nathan Anderson, Mark E. Kingdon, Kingdon Capital Management, Kingdon Offshore Master Fund and K-India Opportunities Fund (KIOF)-Class F.
Hindenburg said the K in K-India Opportunities Fund stands for Kotak Bank. “The Securities and Exchange Board of India appears desperate to assert jurisdiction over us, but its notice conspicuously failed to name a party with actual ties to India: Kotak Bank, which created and oversaw the offshore fund structure used by our investment partners to bet on Adani,” Hindenburg said in a blog post.
SEBI’s argument
In an exchange filing later in the day, Kotak Mahindra Bank said Kotak Mahindra International (KMIL) had been informed by Kingdon that the transactions were made on a principal basis, i.e. on behalf of the company. “Kingdon has never disclosed that it has any association with Hindenburg or that it is acting on any price sensitive information,” Kotak Mahindra Bank said. The bank’s shares were among the top five losers on the Nifty Tuesday.
Sebi noted that there was intense short selling activity in Adani Enterprises’ derivatives ahead of the release of the report.
After the report was released, Adani Enterprises’ shares fell by approximately 60% between January 24, 2023 and February 22, 2023.
Sebi alleged that KIOF-Class F, a foreign portfolio investor, opened a trading account and commenced trading in shares of Adani Enterprises just days before the publication of the Hindenburg report and closed all its short positions after the report was released, making a profit of Rs 1,832.4 crore. The transactions were solely in futures contracts on Adani Enterprises.
The regulator alleged that Mark Kingdon, chief executive officer of Kingdon Capital, received a copy of a draft Hindenburg report on Adani Group from Nathan Anderson as part of an agreement between Kingdon Capital and Hindenburg on November 30, 2022. SEBI said the research firm informed them that the report had been shared exclusively with them.
After the trade was executed, Kingdon Capital notified Hindenburg that it had a short position in Adani.
The agreement also provided for a 30% profit share that Kingdon Capital agreed to with Hindenburg in case of profits from shorting Adani.
However, Hindenburg had verbally agreed to a 25% profit share with Kingdon Capital. The reduced profit share was due to the extra time, expense and effort expended in structuring the Master Fund’s investment in KIOF-Class F and executing the short sale in India.
Sebi alleges conspiracy
This indicates that Hindenburg was aware that the Master Fund was incurring expenses for setting up and activating trading accounts for trading in securities of Adani Enterprises under the draft report, SEBI said in the notice.
The regulators alleged that Hindenburg conspired with Mark Kingdon and other entities to exploit its prior non-public knowledge about the existence, timing and general nature of the research report to enable KIOF-Class F to establish short positions in Adani Enterprises futures and then distribute the profits from closing those positions at the depressed prices resulting from the publication of Hindenburg’s report in a manner that would reduce the share price as much as possible.
“The consideration for providing research services was paid to Hindenburg out of profits made from trading in securities of Adani Enterprises,” Sebi said.
Pursuant to invoices issued by Hindenburg, payments of $2.8 million and $1.4 million were made to Hindenburg on March 31, 2023 and June 1, 2023, respectively.
The remaining amount of $1.4 million has yet to be paid to Hindenburg and the reason for withholding the balance is because Kingdon continues to invest in the K India Fund and the balance was to be paid after those funds were withdrawn, it said.
Sebi said Hindenburg had traded bonds of the Adani Group, specifically Adani Electricity Mumbai, Adani Green Energy and Adani Ports & Special Economic Zone outside India both before and after the publication of the Hindenburg Report.
“During this period, Hindenburg was observed to have incurred a total loss of $5,197 on trading these notes. Hindenburg was also observed to have taken a short position through exchange traded funds and options on the overseas MSCI India index on January 24, 2023. This position was subsequently unwound after the report was released between January and March 2023, resulting in a profit of approximately $9.2 million,” the regulator said.
Posted by Kotak
In a filing with the Securities and Exchange Commission, KMIL shared a certification from Kingdon Capital that transactions recommended by Kingdon Capital were made as principal for the Master Fund’s account and not on behalf of any other entity.
“Our understanding from discussions with Indian market sources is that SEBI’s covert support for Adani began immediately following the publication of the report in January 2023,” Hindenburg said.
“Following our report, we were told that SEBI had exerted covert pressure on brokers to unwind their short positions in Adani shares by threatening costly and persistent investigations, effectively creating buying pressure and setting a ‘floor’ for Adani shares at a critical time,” the report said.
The charges levelled by SEBI against Hindenburg are that the firm violated rules relating to research analysts and that Hindenburg’s express disclaimer that it only held positions through securities traded outside India was misleading and concealed the full extent of its financial interest in the companies that were the subject of its research reports, as it had direct vesting in profits made by overseas investors from positions taken in Adani Enterprises’ futures contracts on Indian stock exchanges.
Sebi said the statement portrays Hindenburg as having no relevance to the Indian market, which is not the case.
“In our view, SEBI has shirked its responsibilities and appears to be more focused on protecting those who have defrauded rather than protecting investors who have been victimized by fraud,” Hindenburg said in its response.
The company lawyers said SEBI has no power to take any action against Hindenburg unless it has a representative in India. Moreover, the research report would fall outside the ambit of the company’s research analyst regulations.
“Further investigations and further enforcement of orders against Hindenburg will definitely pose some challenges for SEBI as Hindenburg is a US-based company,” said Shouvik Dasgupta, partner at Pioneer Legal.
