Last year, the biz world was obsessed with the battle royale between a US short seller—Hindenburg Research—and the Adani Group. Hindenburg is now back in the spotlight for its response to SEBI—which throws a new Indian company under the bus: Kotak Mahindra Bank.
Remind me about Hindenburg…
We did a number of Big Stories on the tamasha. This one explains the allegations in detail; and this one has the follow-up Organised Crime and Corruption Reporting Project (OCCRP) investigation that seemed to confirm those allegations. But here’s the gist of the matter.
Hindenburg who? It is a New York-based shortseller—an investment firm that bets on companies failing. And it often issues forensic financial reports on various companies—and they’re rarely flattering. Back in January, 2023, in an explosive 32,000-word report, the New York-based Hindenburg Research alleged that the Adani Group has engaged in a years-long scheme of fraud and stock market manipulation. All the dirty money words were thrown in: Adani has pulled off the "largest con in corporate history."
The context for the allegations: Indian stock market regulatory rules set a 75% ceiling on the number of shares that a promoter can own in their publicly traded company. The other 25% has to be sold freely on the stock exchange—to prevent manipulation of the shares’ price. The largest non-Adani holders of the group’s stock are funds outside India. They are called "foreign portfolio investors" and own roughly 20%.
The allegations: Hindenburg essentially claims the following:
- Four of these supposed offshore funds are tied to Adani. If you add these suspected entities to promoter ownership, then Adani effectively owns more than 90% of his own stocks.
- This scam deployed 38 shell entities controlled by Gautam’s big brother Vinod Adani or close associates in Mauritius.
- There was little independent oversight of Adani’s financial activities. Adani Group had a tiny auditor named Shah Dhandharia to oversee the activities of its multibillion dollar empire.
The immediate fallout: Adani group stocks took a beating—falling up to 20% after the damaging allegations. Its seven listed companies lost a combined $48 billion in market capitalisation. The Supreme Court appointed an expert committee to investigate the claims—and separately demanded a report from stock market regulator Securities and Exchange Board of India.
The expert committee: proved to be a dud—despite the presence of luminaries such as Nandan Nilekani (Infosys Chairman) and former Supreme Court Justice A M Sapre. In May, they basically let SEBI off the hook:
Despite involving various Indian and overseas agencies in the investigation across multiple countries, "SEBI has drawn a blank", the panel's report said, adding that trying to prove who had invested in foreign portfolio investors (FPI) who then pumped money into Adani and figure out the ultimate beneficial owner could be a massive task. "It is evident that such an exercise could be a voluminous one but potentially a journey without a destination."
This isn’t quite true. The destination for hundreds of millions of dollars was the Adani Group. As for the source, the OCCRP reporting established damning links between Adani’s big brother and the offshore funds financing the investments.
As for SEBI: The stock market regulator finally submitted its report to the Court in August 2023—after repeatedly asking for extensions. But it hasn’t been made public so no one knows what it says. By January 2024, the justices were more interested in whether Hindenburg hurt Indian investors—than any wrongdoing by Adani.
Ok, now what happened…
As part of its investigation, SEBI sent six show-cause notices. The first two were to Hindenburg Research and Nathan Anderson—its founder and sole owner. They were so unhappy, Hindenburg published its SEBI notice—and a lengthy, dismissive response (more on that later). Here’s the new plot twist.
Say hello to Kingdon Capital: Three of those six notices were connected to an investment company called Kingdon Capital. This is an investor partner of Hindenburg. Kingdon acquired a shell company to short Adani shares—and made a hefty packet ($22.11 million) when they tanked—soon after the Hindenburg report was published. Kingdon then gave Hindenburg a 25% cut—or $5.53 million.
Say hello to KIOF Class F: That acronym soup is a shell company. It stands for Kotak India Opportunities Fund Class F. This is the actual company that shorted Adani shares on the Indian stock market. It received the sixth and final show cause notice—though SEBI alleges it is wholly owned by Kingdon.
How short selling works: This is how Wall Street types bet on a company’s future misfortune:
- You ‘borrow’ a stock—for a certain fee—and sell it at the current market price, say $20 in December.
- Then you wait for the company to flail, and investors’ hopes to dim.
- The stock goes down to say $5? You buy the stock back, return it to the person you borrowed it from, and pocket the difference. Simple.
It’s all about timing—and that’s where SEBI comes in.
The timeline: The allegations centre on when research was shared—and when the bets against Adani were placed:
- Hindenburg shares a draft of its damning report with Kingdon in November, 2022—two months before it became public.
- On January 9, 2023, Kingdon inks an Investment Advisory agreement with Kotak-Mahindra International Limited—which owns K India Opportunities Fund.
- Then Kingdon transfers $43 million to the K India Opportunities Fund, which uses the money to build short positions on Adani’s company.
- The shell company KIOF Class F ‘borrows’ 850,000 shares and sells them at a higher price.
- The Hindenburg report becomes public on January 24—and Adani’s stocks crash.
- By the end of February, these short positions are “squared”—i.e. the shell company buys the same number of shares at a lower price—and makes a killing.
Translation: Kingdon used its prior knowledge—acquired from Hindenburg—to time its bets. It knew what the report said and when it would be published.
That sounds kinda shady…
The notice lists a number of ‘crimes’ (See: page 39). It says Kingdon and Hindenburg “colluded” to make a hefty profit off the report—which suggests some kind of illegal conspiracy. It also claims that Hindenburg did not adequately reveal its financial interest in shorting Adani shares. And it says Hindenburg had no legal standing—under Indian regulations—to be issuing research analysis of a company traded on the Indian stock market.
But, but, but: In its response, Hindenburg says these are “nebulous” allegations that use vague language. As for hiding its interests in shorting Adani:
In fact, we disclosed a short position in the very first line of our report and prominently again at the end in big bold letters so readers could weigh the potential for bias given that we stood to benefit from a decline in Adani shares. We then encouraged every reader to do their own research.
Next, Hindenburg made only $31,000—not millions as alleged by SEBI. Plus language like this:
And Net Of Costs We May Barely Come Out Above Breakeven On Our Adani Short
Our Work On Adani Was Never Justifiable From a Financial Or Personal Safety Perspective, But It Is By Far The Work We Are Most Proud Of
Nope, we don’t know what’s with the dramatic excess of capital letters.
Last not least: Hindenburg insists SEBI has no jurisdiction: “Note that we are a US-based research firm with zero Indian entities, employees, consultants or operations.”
And the Kotak angle is?
An Indian company set up the overseas financial structure that allowed Kingdon to short Adani. Hindenburg seized on this angle—mostly to stir the pot:
While SEBI seemingly tied itself in knots to claim jurisdiction over us, its notice conspicuously failed to name the party that has an actual tie to India: Kotak Bank, one of India’s largest banks and brokerage firms founded by Uday Kotak… Instead it simply named the K-India Opportunities fund and masked the “Kotak” name with the acronym “KMIL”.
That’s not true. The notice spells out KMIL when mentioning the Investment Advisory agreement with Kingdon (page 10)—but the word Kotak does not appear again. And SEBI insists that the shell company which made the trades is wholly owned by Kingdon—even though Kotak’s role is glaringly clear.
What Kotak says: Yes, we “facilitated the shorting” of Adani on behalf of Kingdon—but we had no clue about their relationship with Hindenburg. Not until Hindenburg posted the show cause notice—which is a bit odd. Why wouldn’t SEBI at least ask Kotak—an easy-to-reach Indian company—what it knew and when? And if KIOF Class F (where K stands for Kotak) also got a show cause notice…
In any case, as an unnamed Kotak exec told Mint: “Hindenburg has just thrown us under the bus by revealing our name.” The real aim seems to be to dial up the moral outrage:
Uday Kotak, founder of the bank, personally led SEBI’s 2017 Committee on Corporate Governance. We suspect SEBI’s lack of mention of Kotak or any other Kotak board member may be meant to protect yet another powerful Indian businessman from the prospect of scrutiny, a role SEBI seems to embrace.
The bottomline: Hamam mein sab nange hain.
Reading list
You can read the SEBI notice and Hindenburg’s lengthy response to it. Mint has a long explainer—and Kotak’s response. For more on Kotak’s run-ins with regulatory officials—specifically the RBI read these older pieces in The Wire and Mint.
