'Will explore legal options': Kotak Bank probing if Kingdon Capital hid Hindenburg Research links

Kotak Mahindra Bank is investigating the New York-based hedge fund Kingdon Capital over its links to the short seller Hindenburg Research, which issued a report on Adani Group in January 2023, alleging that the conglomerate was responsible for corporate governance failures and market manipulation, Moneycontrol reported on Monday quoting people aware of the matter.

The bank also received a show-cause notice from the security market regulator, the Securities and Exchanges Board of India (SEBI), for aiding Kingdon Capital with a Foreign Portfolio Investor (FPI) licence. The lender is also examining whether Kingdon's declarations were misleading, they said.

Kingdon claimed that the trades in the Adani Group of companies were “principal trades.” However, the current law states that offshore funds like Kingdon Capital are only allowed to undertake proprietary trades and cannot invest on behalf of any third-party firm.

"Based on the evaluation, Kotak will take a call on whether it wants to initiate legal proceedings against Kingdon," Moneycontrol reported, citing one of the sources.

SEBI's investigation on Kingdon Capital:

A SEBI investigation has discovered that Kingdon Capital had a prior agreement to share the 30 per cent profits from the Adani Group trade with Hindenburg Research. This makes them party to the money flowing into the trades on behalf of Hindenburg.

As per the SEBI notice sent to Hindenburg, Kingdon Capital purchased a controlling stake in an entity with an FPI license created by a subsidiary of Kotak Mahindra Bank to take short positions on the future securities of Adani Enterprises.

“The fund was well aware if they disclosed the relationship between them and Hindenburg, Kotak wouldn’t have set up the FPI account since only principal trades are allowed and hence there is a view that Kingdon deliberately kept these links a secret,” said one of the sources quoted above according to the report.

“Kotak will explore legal options,” said one of the anonymous sources per the report.

Kotak Mahindra Bank and Kingdon Capital did not provide any response to Moneycontrol emails.

The SEBI notice to Hindenburg unexpectedly placed Kotak Mahindra Bank under SEBI scrutiny in the whole Adani-Hindenburg Saga. The shares of Kotak Mahindra Bank fell 4 per cent in the intraday trading session on Tuesday, July 2, when the notice was made public.

Moneycontrol quoted legal experts who said that legal concerns arising from the contractual breach may have to go through the arbitration process at a specified court of law. If the matter becomes criminal, then Kotak directly takes it to court.

“The case can be filed both in India where the transaction was executed or in the US where Kingdon is based out of and Kotak can claim damages also in such a scenario,” the securities lawyer told Moneycontrol.

SEBI has officially given Hindenburg 21 days to give an official response to its allegations.