Kotak, caught in Adani-Hindenburg storm, says wasn’t aware of manipulative trade

Kotak Mahindra Bank Ltd has found itself dragged into the midst of the Hindenburg Research-Adani Group storm with the US short-seller in its latest salvo accusing India's market regulator of trying to shield the private bank and other Indian entrepreneurs.

Hindenburg was responding to a show-cause notice from the Securities and Exchange Board of India (Sebi) for allegedly violating Indian regulations, including on how it traded and profited. In its response, the research firm said Sebi was not upfront in disclosing the involvement of a Kotak bank subsidiary's fund in shorting Adani stocks.

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

A Kotak Mahindra Bank executive, who spoke with Mint on the condition of anonymity, said the bank learnt about the association between Hindenburg Research and Kingdon Capital only after the short seller posted a copy of Sebi's 26 June notice to it on its website on Tuesday.

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

“KMIL is the largest fund manager for India and any large global investor will naturally look at 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 was never aware that Hindenburg was a partner of any of its investors. KMIL has also received a confirmation and declaration from the fund’s investor that its investments were made as a principal and not on behalf of any other person.”

Kotak shares were down by about 2% in afternoon trading on NSE on Tuesday, while the broader Nify and Sensex indices were nearly unchanged.

The Adani-Hindenburg sage

Hindenburg in response to Sebi's notice said on Tuesday that the markets regulator had failed to disclose Kotak Mahindra Bank's role in the matter, claiming that the Indian bank oversaw the offshore structure used by Kingdon Capital to short Adani stocks.

“While Sebi seemingly tied itself in knots to claim jurisdiction over us (Hindenburg), its notice conspicuously failed to name the party that has an actual tie to India: Kotak (Mahindra) 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,” the short seller said.

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

Hindenburg also alleged that Sebi’s omission of Kotak’s name may have been intended to protect the businessman from scrutiny.

Also Read: Adani puts Hindenburg behind with a $3-billion fundraising plan

Hindenburg Research had in January 2023 published a report accusing Adani group companies of stock manipulation and accounting fraud, ahead of a proposed ₹20,000 crore share sale by Adani Enterprises Ltd.

This resulted in a $150 billion meltdown in the shares of Adani group's 10 publicly listed companies, even as the conglomerate termed the report malicious and baseless.

In January this year, in some respite to the Adani Group, India's Supreme Court ruled that the conglomerate would not face further investigations beyond Sebi's current scrutiny. The markets regulator has been probing the Adani Group for tax haven use and stock manipulation.

The Kotak fund in question

K-India Opportunities Fund Ltd is a Sebi-registered foreign portfolio investor 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 to the fund, had opened a trading account under Kingdon Capital's name and started trading in Adani shares a few days before the release of the Hindenburg report, and then squared off its entire short position post the publication of the report.

KMIL clarified that the fund follows due KYC (know-your-customer) procedures while onboarding clients and all its investments are made in accordance with all applicable laws. We have cooperated with regulators in relation to our operations and continue to do so, it said.

Also Read: The Adani-Hindenburg episode has given investors lessons on market risk

The latest twist in the Adani-Hindenburg saga couldn't have come at a worse time for Kotak Mahindra Bank that has been under the regulatory lens over the last few months.

"It looks like Kotak is walking on eggshells all the time," said the bank executive quoted earlier.

On 1 September, the bank's founder Uday Kotak stepped down as managing director and chief executive, four months before his term ended.

The Reserve Bank of India's April 2021 rules on corporate governance in private sector banks capped maximum tenure of promoters who are MD and CEO at not more than 12 years, with an option to extend it to 15 years with the discretion of the banking regulator.

Kotak is currently serving as the non-independent director on the bank's board.

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

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

Also read | Kotak Bank's rollercoaster: From setbacks to a surging Q4