Fresh twist: Hindenburg gets Sebi notice for ‘shorting Adani shares’

According to Hindenburg, the K in K-India Opportunities Fund stands for Kotak Bank. “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…, which created and oversaw the offshore fund structure used by our investor partner to bet against Adani,” Hindenburg said in its blog.

SEBI’s contention
In an exchange filing late evening, said (KMIL) was informed by Kingdon 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 Mahindra Bank said. The lender's stock featured in the list of top five losers on the Nifty Tuesday.

Sebi observed that prior to the publication of the report, there was concentration in short-selling activity in the derivatives of Adani Enterprises.

After the report was published, the price of Adani Enterprises fell about 60% between January 24, 2023 and February 22, 2023.

Sebi alleged that KIOF- Class F, a foreign portfolio investor, opened a trading account and started trading in the shares of Adani Enterprises just a few days prior to the publication of the Hindenburg report and then squared off its entire short positions after the report was published, making profits of Rs 183.24 crore. It traded only in the futures of Adani Enterprises.

The regulator alleged that on November 30, 2022, Mark Kingdon, chief executive of Kingdon Capital, received a copy of the draft of the Hindenburg report on the Adani Group from Nathan Anderson as part of an agreement between Kingdon Capital and Hindenburg. They were informed by the research firm that the report was exclusively shared with them, Sebi said.

After trades were executed, Kingdon Capital informed Hindenburg that they had a short position in Adani.

The agreement also stipulated a profit-sharing of 30% that Kingdon Capital had agreed with Hindenburg in the case of any profits made by them on the short sale in Adani.

However, Hindenburg orally agreed to 25% profit-sharing with Kingdon Capital. The reduction in profit share was due to the extra time, cost and effort that went into structuring the master fund’s investment in KIOF- Class F and executing a short sale in India.

Sebi Alleges Collusion
This shows that Hindenburg was aware that the master fund was incurring costs for setting up and activating trading accounts for trading in securities of Adani Enterprises based on its draft report, Sebi said in its notice.

The regulator alleged that Hindenburg colluded with Mark Kingdon and other entities in a scheme devised to use advance knowledge of non-public information regarding the existence, timing, and overall nature of the research report to enable KIOF - Class F to build short positions in the futures of Adani Enterprises. And then to share profits accrued from squaring-off the positions at prices deflated due to publication of the Hindenburg report in a manner designed to lower share prices to the maximum extent possible.

“As consideration for providing research services…Hindenburg was paid out of the profits made pursuant to trades in the securities of Adani Enterprises,” Sebi said.

Amounts of $2.8 million and $1.4 million were paid to Hindenburg on March 31, 2023, and June 1, 2023, respectively, following the invoices raised by Hindenburg.

The balance amount of $1.4 million had not yet been paid to Hindenburg and the reason for holding back the balance amount was that Kingdon continued to have an investment in the K India Fund and expected to pay the balance once these funds had been withdrawn, it said.

Sebi said Hindenburg had traded outside India, in the bonds of Adani Group, namely, Adani Electricity Mumbai, Adani Green Energy and Adani Ports & Special Economic Zone, around the publication of the Hindenburg report.

“It was observed that Hindenburg made an overall loss of $5,197 by trading in these bonds during this period. It was also seen that Hindenburg had taken short positions through ETFs and options on MSCI India Index abroad, on January 24, 2023. The said positions were subsequently squared off after release of the report during January-March 2023, making a profit of around $9.2 million,” the regulator said.

Kotak Submissions
In its submission to Sebi, KMIL shared an undertaking from Kingdon Capital stating that the transactions recommended by Kingdon Capital were and are as principal for the account of the master fund — and not as a representative of any other entity.

“Our understanding from discussions with sources in the Indian market is that Sebi’s surreptitious aid of Adani commenced almost immediately post-publication of our January 2023 report,” Hindenburg said.

“Following our report, we were told that Sebi pressured brokers behind-the-scenes to close short positions in Adani under the threat of expensive, perpetual investigations, effectively creating buying pressure and setting a ‘floor’ for Adani’s stocks at a critical time,” it said.

Sebi’s charges against Hindenburg are that it violated its rules on research analysts. Also, the specific disclaimer that Hindenburg held positions only through non-Indian traded securities was misleading since it concealed the complete extent of its financial interest in companies that were the subject of its research report, due to its direct stake in profits from positions taken by the overseas investor in the futures of Adani Enterprises on Indian stock exchanges.

The statement portrayed non-association of Hindenburg with the Indian markets, which was not true, Sebi said.

“In our view, Sebi has neglected its responsibility, seemingly doing more to protect those perpetrating fraud than to protect the investors being victimised by it,” Hindenburg said in its response.

Corporate lawyers said, Sebi has no powers to take any action against Hindenburg unless it has representation in India. Further, the research report would not fall within the ambit of its Research Analysts regulations.

“Since Hindenburg is a US-based company, any further investigation into and further enforcement of any order against Hindenburg certainly poses some challenges for Sebi,” said Shoubhik Dasgupta, Partner, Pioneer Legal.