Kotak Bank created fund used to bet against Adani: Hindenburg

Hindenburg on Monday said that Kotak Mahindra Bank, founded by Uday Kotak, created and managed the offshore fund structure used by one of its investor partners for Adani stock trades ahead of the Hindenburg report last January. The Kotak stock was among the top five Nifty losers Tuesday.

The allegations come after the market regulator, Securities and Exchange Board of India (Sebi), issued a show-cause notice on June 27 to six entities, including K India Opportunities Fund (KIOF), a Sebi-registered foreign portfolio investor (FPI) managed by Kotak Mahindra International.

The Sebi showcase notice said Hindenburg allegedly enabled Kingdon Capital to set up a fund, K Indian Opportunities Fund, to create short positions in Adani stocks ahead of the Hindenburg report. On January 9, 2023, Master Fund owned by Mark Kingdon transferred $40 million to KIOF, of which $15 million was converted into rupees and used as margin to take short positions on Adani Enterprises futures.

According to Sebi, these positions were squared off in February 2023, leading to a gain of $22.25 million.

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Kotak Mahindra Bank did not respond to ET's specific queries. However, in an exchange filing the lender said that KMIL was informed by Kingdon that the transactions were made on a principal basis, i.e. for themselves. "Kingdon never disclosed that they had any relationship with Hindenburg nor that they were acting on the basis of any price sensitive information," Kotak said.

According to the show-cause notice, Sebi said a short position of 850,000 shares were built in the futures of Adani Enterprises by KIOF on January 20, 2023. Between February 1 and 22, 2023, these shares were squared off, resulting in a profit of ₹183 crore. After the release of the report, Adani Enterprises lost 59% between January 24 and February 22, 2023.

Sebi said that KIOF was aware of the time when the Hindenburg report would be disseminated to the public and planned the short sale accordingly.

"By effecting a scheme to share with Hindenburg the profit from the trade in Indian listed companies based on an overall negative draft of Hindenburg report whose timing of publication was known to KIOF through Kingdom Capital, and by failing to ensure that the research report was used in compliance with RA Regulations, KIOF failed to exercise due diligence, engaged in fraudulent transactions, which is in violations of the Sebi FPI regulations," the Sebi show case notice said.

In response, Kotak said "Neither the Fund nor KMIL were aware that Kingdon entities, which include a US SEC registered investment advisor, in respect of whom KYC as per law was duly performed, had any association with Hindenburg. The Fund and KMIL had no prior knowledge of the publication of the aforesaid Hindenburg report."

Share of Kotak Mahindra Bank which fell as much as 4% intraday Tuesday ended 2.16% lower at ₹1,769.60.

Hindenburg in its blog criticised the market regulator for failing to name the Kotak Mahindra Bank in the show cause notice.

"While Sebi seemingly tied itself in knots to claim jurisdiction over us, its notice conspicuously failed to name the party that has an actual tie to India: Kotak Bank, one of India's largest banks and brokerage firms founded by Uday Kotak, which created and oversaw the offshore fund structure used by our investor partner to bet against Adani. Instead, it simply named the K-India Opportunities fund and masked the "Kotak" name with the acronym "KMIL".