The list of dramatis personae in the drama that unfolded after Hindenburg’s report of 24 January 2023 on the Adani Group has grown. Online searches for ‘Kingdon Capital Management’ and ‘Kotak India Opportunities Fund Class F’ surged this week on news of the American short-seller’s reaction to a show-cause notice sent by the Securities and Exchange Board of India (Sebi).
The market regulator had dubbed Hindenburg’s report sensationalist, asking it to explain its allegedly unfair efforts to profit from a crash in Adani stocks that followed its allegations of fraud, stock manipulation and more, all of which were denied by Adani even as the market value of its listed firms shrank. Kingdon, a US-based hedge fund, was named by Sebi’s notice as Hindenburg’s sole investor. Its role?
It began betting against Adani shares a fortnight before that report was published. In its public response, Hindenburg accepted Kingdon as an “investor partner,” but sought to highlight the role played by Kotak Mahindra Bank in setting up an offshore fund—a ‘Class F’ spinoff of an existing fund—that was used by the hedge fund for acts of short-selling under Sebi’s scanner. This has dragged yet another name into a story that has kept market watchers agog for over 17 months.
Do these actors merit a spotlight in the long arc of the Adani-Hindenburg saga? To distance itself from controversy, Kotak has denied fore-knowledge of Kingdon’s link with Hindenburg and of the latter’s report. The bank said it did not know that the US hedge fund would act on the basis of price-sensitive information, given that it had confirmed it would operate solely by what was publicly known.
Kotak’s Class F unit was a shell company registered in March 2022 and bought by Kingdon in December that year. According to Sebi’s timeline, the US hedge fund purchased it about a month after getting a draft of the Hindenburg report that would batter Adani stocks.
Since Sebi was probing a market bout of short-selling, it had good reason to focus on the actual sellers—or direct profit makers—more than their investment vehicles. Unless evidence emerges of Kotak collusion with Kingdon, it is the latter’s association with events that’s far more likely to endure.
The story isn’t over. Sebi was asked last year by the Supreme Court to investigate not just proximate causes of the volatility in Adani stocks (which have largely recovered since), but also to probe the Adani Group in the context of Hindenburg’s allegations. This January, the court said that most aspects of Adani’s conduct had been looked into by Sebi and its investigation “inspired confidence,” but two parts were pending, as Sebi awaited inputs from foreign regulators to conclude the process.
While we await this conclusion, a larger lesson from the episode can still be drawn. Recall that Adani stocks saw steep drops even before Hindenburg took centre-stage, with those investor jitters attributed to the companies’ allegedly unclear compliance with Sebi’s 25% free-float rule, seen as exposing them to distortive swings in market value.
In general, markets for such assets work best when they have sufficient depth of trading, with a sizeable volume of stocks being bought and sold daily at prices determined by a wide interaction of demand and supply.
The more widely a firm’s equity is held, the better its share price captures its true value, thanks to a broader blend of views. It would serve everyone well if all high-profile listed companies took note. It would make stock-rigging charges hard to level.
