Mint Explainer: Hindenburg’s latest salvo against Sebi and Adani—and Kotak

This Mint Explainer was first published on 2 July 2024. Mint is reposting this after Hindenburg Research on 10 August raised fresh allegations, this time against the chief of the Securities and Exchange Board of India. 

The US-based short seller alleged that India's markets regulator was unwilling to act on its January 2023 report on the Adani Group because Sebi chairperson Madhabi Puri Buch and her husband Dhaval Buch had investments in offshore funds that had links with the Adani Group.

The Sebi chief and her husband have denied the allegations, terming them ‘baseless’ and an attempted ‘character assassination’.

US short-seller Hindenburg Research said it had received a notice from India’s stock market regulator outlining suspected violations of Indian regulations. The notice, dated 26 June 2024, was in response to Hindenburg’s 25 January 2023 report in which the short-seller had charged Indian billionaire Gautam Adani with “pulling the largest con in corporate history”.

The Adani group had denied the allegations, but shareholders were rattled as the value of 10 listed Adani Group entities declined by $150 billion over the three months after Hindenburg published its report.

In some respite to the ports-to-cement conglomerate, India’s Supreme Court on 3 January this year ruled out a separate investigation into Hindenburg’s allegations. It directed the Securities and Exchange Board of India to complete its investigation on the matter in three months.

In its June notice to Hindenburg, Sebi states that the research firm profited from taking a short position in Adani stocks. It noted that Hindenburg had signed an agreement with investor Kingdon Capital Management in May 2021, twenty months before it published its report accusing Adani of stock manipulation and accounting fraud.

Hindenburg responded to the notice on 1 July (US time), saying it had been aware that Sebi had been grappling with how to respond to a US-based research firm with no presence or operations in India.

Mint explains the key aspects of the latest development in the Adani-Hindenburg saga, which has now also dragged in Kotak Mahindra Bank Ltd.

What is Sebi's show-cause notice to Hindenburg all about?

The show-cause notice dated 26 June 2024 was sent to Hindenburg and Kingdon Capital Management, the only investor with which the US short-seller shared its damning report on the Adani Group before publishing it.

The notice details how Hindenburg violated some regulations, including inadequate disclosures on how it traded and profited. It estimates Hindenburg made $14.7 million from taking a short position in Adani stocks.

Sebi’s 46-page notice, as shared by Hindenburg, states that the short-seller’s report made some inaccurate statements to mislead readers and create panic among investors.

How has Hindenburg responded?

Hindenburg said on 1 July that the notice was “nonsense, concocted to serve a pre-ordained purpose: an attempt to silence and intimidate those who expose corruption and fraud perpetrated by the most powerful individuals in India”.

Hindenburg concluded that Sebi’s action was akin to shooting the messenger as the market regulator seemed “more interested in pursuing those who expose such practices”.

Who was Hindenburg’s silent partner or investor?

US hedge fund Kingdon Capital Management was the investor that partnered with Hindenburg. According to filings with the US market regulator, Kingdon Capital Management, established in 1983 by financier Mark Kingdon, had $640 million in assets under management at the end of March 2024.

How much did Kingdon Capital and Hindenburg profit following the Adani report?

According to Sebi, Kingdon Capital Management was the only investor with which Hindenburg shared the report before it was published. Kingdon Capital Management made a profit of $22.11 million by trading in futures of Adani Enterprises Ltd shares, per Sebi. Hindenburg's share totalled $5.53 million, or 25% of Kingdon Capital Management’s profit.

From November 2022 to March 2023, Hindenburg had incurred a loss of $5,197 from trading bonds of Adani Electricity Mumbai, Adani Green Energy, and Adani Ports and Special Economic Zone outside of India.

Also read | A year since Hindenburg firestorm, where do Adani stocks stand?

Hindenburg earned $9.2 million when it took short positions through exchange-traded funds and options on the MSCI India Index on 24 January 2023. Hindenburg's total earnings, according to Sebi, were $14.7 million.

Hindenburg’s reply claims it made only $31,000.

What is the other important revelation in Hindenburg’s reply?

Hindenburg in its response to Sebi’s notice also said Kotak Mahindra Bank Ltd had created and oversaw the offshore fund structure that Kingdon Capital Management had used to profit from the trade.

Sebi in its notice states that offshore entity K-India Opportunities Fund had traded in futures of Adani Enterprises shares. Hindenburg said in its response that K-India Opportunities Fund stands for Kotak India Opportunities Fund.

How did Kotak India Opportunities Fund work?

Sebi said in the notice that the K-India Opportunities Fund Class F was registered on 4 March 2022, about 10 months before Hindenburg released its report in January 2023.

According toMint's review of the Mauritius company’s registry, K-India Opportunities Fund Class F was part of K-India Opportunities Fund, a Mauritius-based entity incorporated on 20 March 2013.

Sebi said K-India Opportunities Fund Class F had no “Participating Redeemable Shareholders”. Simply put, it was a shell entity.

Also read | 'Kotak fund wasn't aware of Hindenburg's relationship with its investor'

On 20 November 2022, Hindenburg shared a draft report with Kingdon Capital Management. Hindenburg and Kingdon Capital Management signed an agreement about its work on 26 May 2021.

On 28 December 2022, a firm owned by Kingdon bought 100% of the shell company's shares and started taking short positions on futures of Adani Enterprises shares on 10 January 2023.

How has Hindenburg’s latest salvo affected the Adani Group and the shares of its companies?

After it published its report in January 2023, the Adani Group cancelled a share sale by Adani Enterprises as the value of all 10 listed group companies crashed by about half over the next three months.

However, after Hindenburg’s latest statement, the shares of Adani Group companies were hardly changed. Shares of Kotak Mahindra Bank, though, fell 2% in early trade on Tuesday, while the broader Nifty and Sensex indices were mostly unchanged

Also read | Adani puts Hindenburg behind with a $3-billion fundraising plan