Kotak, caught in Adani-Hindenburg storm, claims it was unaware of manipulative trade

BOMBAY:Kotak Mahindra Bank Ltd has found itself caught in the middle of the Hindenburg Research-Adani Group storm with the US short-seller in its latest salvo accusing the Indian market regulator of trying to protect the private bank and other Indian entrepreneurs.

Hindenburg was responding to a notice from the Securities and Exchange Board of India (Sebi) for alleged violations of Indian regulations, including how it traded and made profits. In its response, the research firm said Sebi had failed to openly disclose the involvement of a fund of a Kotak Bank subsidiary in short-selling Adani shares.

Reacting to the development, Kotak Mahindra (International) Ltd, a unit of Kotak Mahindra Bank, said Hindenburg Research was never a client or investor in its K-India Opportunities Fund Ltd. But it acknowledged that the fund had facilitated short selling of Adani shares for Kingdon Capital Management, an investor-partner of the US short seller.

A Kotak Mahindra Bank executive who spoke to mint On condition of anonymity, the bank said it only came to know about the tie-up between Hindenburg Research and Kingdon Capital after the short-seller posted a copy of Sebi’s June 26 notice on its website on Tuesday.

“Hindenburg has just thrown us under the bus by revealing our name,” said the Kotak Mahindra Bank chief. “If a fund manager whose stock is trading at 200 times price to equity decides to sell, how do we know it is a manipulative trade?”

“KMIL is the largest fund manager in India and any large global investor will naturally look to us,” he added.

Also read | Mint Explainer: Hindenburg’s latest salvo against Sebi and Adani – and Kotak

In a statement, Kotak Mahindra (International) Ltd said, “The fund has never been aware of Hindenburg being a partner of any of its investors. KMIL has also received confirmation and representation from the fund investor that its investments were made as a principal and not on behalf of any other person.”

Kotak shares were down around 2% in afternoon trade on the NSE on Tuesday, while broader indices Nify and Sensex were virtually unchanged.

The wise Adani-Hindenburg

Responding to the Sebi notice, Hindenburg on Tuesday said the markets regulator had not disclosed Kotak Mahindra Bank’s role in the matter, saying the Indian bank oversaw the offshore structure used by Kingdon Capital to short Adani shares.

“While Sebi has apparently gone to great lengths to claim jurisdiction over us (Hindenburg), its notice has conspicuously failed to name the party that has a real nexus with India: Kotak (Mahindra) Bank, one of India’s largest banks and brokerage firms founded by Uday Kotak, who created and oversaw the offshore fund structure used by our investor partner to bet against Adani,” the short-seller said.

“Instead, it simply named it K-India Opportunities Fund and masked the name ‘Kotak’ with the acronym ‘KMIL’.

Hindenburg also claimed that Sebi’s omission of Kotak’s name may have been to shield the businessman from scrutiny.

Hindenburg Research had published a report in January 2023 accusing Adani group companies of stock market manipulation and accounting fraud, in anticipation of a merger project. ₹Adani Enterprises Ltd. to sell shares worth Rs 20,000 crore

This led to a $150 billion drop in shares of the 10 listed companies of the Adani group, even as the conglomerate called the report malicious and baseless.

In January, India’s Supreme Court ruled that the Adani group would not be subject to further investigations than those currently being conducted by Sebi. The financial markets regulator is investigating the Adani group for use of tax havens and stock market manipulation.

The Kotak fund in question

K-India Opportunities Fund Ltd is a foreign investment fund registered with Sebi and regulated by the Financial Services Commission of Mauritius. The fund was established in 2013 to enable foreign clients to invest in India.

Kotak Mahindra (International) Ltd, which acted as the investment manager of the fund, had opened a trading account under the name Kingdon Capital and started trading in Adani shares a few days before the Hindenburg report was released, and then liquidated its entire short position after the report was released.

KMIL clarified that the fund follows KYC (Know Your Customer) procedures while onboarding clients and all its investments are made in compliance with all applicable laws. We have been cooperating with regulators regarding our operations and continue to do so, it said.

The latest twist in the Adani-Hindenburg saga could not have come at a worse time for Kotak Mahindra Bank, which has been under regulatory scrutiny for the past few months.

“Kotak seems to be walking on eggshells all the time,” the bank executive quoted above said.

On September 1, the bank’s founder, Uday Kotak, resigned as its managing director and chief executive officer, four months before his term was due to end.

The Reserve Bank of India’s April 2021 rules on corporate governance in private sector banks have capped the maximum tenure of promoters who are managing directors and CEOs at up to 12 years, with the option of extending it to 15 years at the discretion of the banking regulator.

Kotak is currently a non-independent director on the bank’s board.

Then, in April this year, the RBI stopped the bank from onboarding new customers through its online and mobile banking channels and barred it from issuing new credit cards immediately.

The central bank found deficiencies and non-compliances in the bank’s IT system and its “continued failure to comply with the RBI’s corrective action plan”.

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