In today's Finshots, we tell you why Kotak Mahindra Bank has suddenly found itself stuck in the Adani versus Hindenburg row.

The Story

Last year, Hindenburg Research, the US-based research firm and short seller, dropped a bombshell report accusing the Adani Group of stock price manipulation and accounting fraud.

It claimed that Gautam Adani and his family made a fortune of over $120 billion. And that over $100 billion of it came in the past 3 years, through an unusual 800% rise in the stock prices of Adani’s 7 listed companies.

They say that this happened through shady tactics, such as creating fake shell companies in offshore tax havens like Mauritius, which allegedly funnelled money out of India and back in as foreign investments, faking a huge foreign interest in Adani stocks.

This report obviously blew up and had a resounding impact on the Adani group companies. To put things in perspective, Adani’s wealth alone dropped by more than $80 billion in the month after the report. And at one point his conglomerate even lost over $150 billion in market value.

Now, market regulator SEBI felt that these allegations obviously had to be looked into. At the same time, it also wanted to investigate the accusers to make sure there wasn't any foul play. So it issued a show cause notice to Hindenburg and a few others accusing them of spreading misleading information that led to panic selling of Adani stocks in 2023.

It was particularly miffed that Hindenburg was not a registered Research Analyst (RA). Which meant that it couldn’t have gone about publishing such reports in the first place.

And it’s Hindenburg’s response to this notice that has revived the chatter around the Adani-Hindenburg saga, albeit with a new twist.

For starters, it blamed SEBI for trying to protect Indian conglomerates like Adani and stifle their whistleblowing efforts.

But Hindenburg’s most shocking claim? That SEBI was covering up Kotak Mahindra Bank’s involvement in short-selling Adani shares. Wait… What?

Let’s explain.

See, if Hindenburg had to short sell Adani stocks, it had to depend on a foreign or offshore fund. For the uninitiated, short selling simply involves borrowing shares you think will drop in price, selling them at the current price, and then buying them back cheaper, so that you can return the shares and keep the difference. For example, if you borrow and sell shares at $50 each and buy them back at $40, you make $10 per share.

And to do this, Hindenburg partnered with Kingdon Capital Management, a US hedge fund. But offshore funds wanting to trade in India must register as a foreign portfolio investor (FPI) with SEBI. And that could take at least a month since getting an FPI license required investors to submit documents like KYC (Know Your Customer) details and other information on who the ultimate beneficial owner would be.

But remember that we're talking about December 2022. And Kingdon probably had just a few days to do this because it had to short Adani stocks well before Hindenburg published its report.

So instead of going the long route, Kingdon simply decided to take the help of a readymade structure that was already in place. Courtesy: Kotak Mahindra International (KMIL), a Kotak Mahindra bank subsidiary. KMIL advised Kingdon to take over a sub fund of K-India Opportunities Fund Ltd (KIOF), a Mauritius-based fund it managed and one which was already registered with the SEBI since 2022. Kingdon then subscribed to KIOF’s shares a few days before Hindenburg published its sensational report, got KIOF to short sell Adani stocks and ultimately made a whopping $22 million (or over ₹180 crores).

But here's the thing. SEBI isn’t making a fuss about that. And Hindenburg now wants answers as to why it mentioned the entire structure in its notice but downplayed Kotak’s role by not fully disclosing its name. Instead, it used the acronym KMIL to camouflage Kotak and protect its market reputation. And that, Hindenburg believes, is another effort by the market regulator to shield influential Indian businessmen from scrutiny.

But guess what? Kotak says that it facilitated these Adani stock transactions for Kingdon Funds. And that it had no idea of Kingdon’s nexus with Hindenburg Research.

So yeah, that’s the long and short of it.

Will that put pressure on SEBI to further investigate Kotak Bank’s involvement in the Hindenburg-Adani saga and take action?

Well, we’ll only have to wait and see.

Until then…

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