Mumbai, July 3, 2024 — The Securities and Exchange Board of India (SEBI) has issued a show-cause notice to US-based short-seller Hindenburg Research, questioning its adherence to norms prohibiting fraudulent and unfair trading practices in the securities market. The notice, dated June 26, was released online by Hindenburg, which dismissed the allegations as “nonsense” and “nebulous,” claiming attempts to silence the firm.
Allegations Against Hindenburg and Kingdon Capital
SEBI’s notice alleges that Hindenburg colluded with its investor partner, Kingdon Capital, to mislead the public and manipulate prices using non-public information. The regulator claims that Kingdon Capital knew about Hindenburg’s research on the Adani group before the report’s public release and had a profit-sharing agreement with Hindenburg. According to SEBI, Kingdon agreed to share 30% of its net profits from trading Adani-related securities with Hindenburg in exchange for early access to the report, which was published in January 2023.
Hindenburg’s Defense and Kotak Mahindra Involvement
In response, Hindenburg asserted that SEBI is neglecting its responsibility to protect investors and is instead shielding those perpetrating fraud. The firm claimed it only made $4 million from its operation, which led to a $153 billion drop in the Adani group’s valuation. Hindenburg also brought Kotak Mahindra International into the spotlight, alleging that the bank created the offshore fund structure used by Kingdon Capital to short Adani stocks.
Kotak Mahindra Bank acknowledged the inclusion of its fund, managed by Kotak Mahindra International (KMIL), in SEBI’s show-cause notice. The bank stated that Kingdon Capital informed KMIL that the transactions were made on a principal basis and that they had no disclosed relationship with Hindenburg nor acted on price-sensitive information. “We deny any allegation of being aware of such a report or acting in collusion in any manner with Kingdon or Hindenburg,” the bank said in a statement.
Market Reactions and SEBI’s Scrutiny
Following Hindenburg’s disclosure of SEBI’s notice, Kotak Bank shares dropped by 2.4%. In its reply to SEBI, Hindenburg questioned why the regulator did not highlight Kotak’s involvement, suggesting an effort to protect another powerful Indian businessman from scrutiny.
Hindenburg referenced Kotak group founder Uday Kotak’s chairmanship of the 2017 Committee on Corporate Governance to bolster its defense, stating, “We suspect SEBI’s lack of mention of Kotak or any other Kotak board member may be meant to protect yet another powerful Indian businessman from the prospect of scrutiny, a role SEBI seems to embrace.”
Kotak’s Statement and Continued Cooperation
A Kotak group spokesperson stated, “KIOF (K India Opportunities Fund – a SEBI-registered FPI regulated by the Financial Services Commission of Mauritius), was established in 2013 to enable foreign clients to invest in India. The fund follows due KYC procedures while on-boarding clients and all its investments are made in accordance with all applicable laws. We have cooperated with regulators in relation to our operations and continue to do so.”
The spokesperson also denied any association with Hindenburg, stating, “KMIL and KIOF unequivocally state that Hindenburg has never been a client of the firm nor has it ever been an investor in the fund.”
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