Adani saga heads for a messy closure

Hindenburg, emboldened by the belief that it is beyond SEBI's jurisdiction, did what Indian regulated entities would never dare to do: it posted the show cause notice from SEBI while mincing no words in accusing the regulator of treating local corporate biggies with kid gloves, training its guns on the messenger instead of going to the bottom of the message, and even threatening to invoke the RTI law to fish out details of what transpired in the multiple meetings between the capital market regulator and Adani officials.



Much of this could simply be for effect. Just as SEBI knows it can do very little besides slapping a notice on Hindenburg, the latter is aware that it can never lay its hands on the minutes of SEBI meetings. Amid this shadow boxing, the Adani group, the original protagonist of the story, may be having the last laugh: the stocks prices of Adani companies have roared back since Hindenburg's damaging report in January 2023; the floating stock of these listed entities has increased following investments by global investors; and, now the spotlight has suddenly shifted to an unexpected, even if a short-lived, tussle between Hindenburg, its bete noire, and the regulator.

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No one, maybe not even Hindenburg, can deny that rules were twisted, if not outright broken. The offshore firm did not tie up with any SEBI regulated local research analysts in putting out a detailed, riveting report on Adani, accusing it of price manipulation and accounting fraud, even though most of the content was culled out from publicly available information. Instead of charging a plain fee for its research, it cut a profit-sharing deal with Kingdon, a curiously named Cayman investor, which took short futures positions in the Adani flagship stock.

The trades by Kingdon brought to the fore the role played by Kotak - an interesting revelation from Hindenburg's outburst on Tuesday. Since Kingdon is an overseas firm not regulated in India, it used a Kotak entity, a Mauritius-incorporated foreign portfolio investor (FPI) registered with SEBI, to do the trades. SEBI suspects that Kotak, which handled the hurriedly organised trades, was privy to the contents of the Hindenburg report (which was yet to be published), the timing of its release, and the possible havoc it would cause. These are 'non-public information' (NPI) as opposed to 'unpublished price sensitive information' (UPSI), a more familiar term in equity market stories on price manipulation and insider trading. Technically, an FPI does not question the trades of its investors. However, if Kotak, as a fund vehicle and custodian, had consciously facilitated these Kingdon trades, it (according to SEBI) was a violation of fund regulations and code of conduct. But was Kotak in possession of the NPI? That's for SEBI to prove, though Kotak denied it was aware of Hinderburg's deal with Kingdon.

The Kotak element in the Adani story, which perhaps would have surfaced later, boiled over with Hindenburg trying to buttress its allegation that the regulator was soft on Indian companies - a rather sweeping insinuation as the Kotak fund was also showcaused, along with Hindenburg.

Based on its findings, SEBI had questioned Adani about related party transactions and inadequate disclosures though many would think it's a mere rap on the knuckle. However, Hindenburg's surprise counterattack could make the closure of the messier than what SEBI had bargained for.