Kotak Mahindra International Ltd, a subsidiary of Kotak Mahindra Bank, was the investment manager for trades undertaken by K India Opportunities Fund Class F a registered FPI that traded in the futures of Adani Enterprises a few days prior to the publication of a report on Adani group by Hindenburg Research, according to an investigation by Securities and Exchange Board of India.
In turn Kingdon Capital was the investment advisor to Kotak Mahindra International Ltd under an agreement between the two entities on January 5, 2023, a SEBI show-cause notice, allegedly issued to Hindenburg Research, said.
In page 10 of the show-cause notice SEBI has mentioned about the investment advisory agreement between Kingdon Capital and Kotak Mahindra International, which it subsequently referred to as KMIL.
Kingdon Capital was a client of Hindenburg Research, which had shared the report with it prior to its publication. It is majority held by Mark Kingdon, who was also the ultimate beneficiary owner of an offshore master fund that subscribed to the shares of K India Opportunities Fund, which had taken short position in the futures of Adani Enterprises. Kingdon Capital had a profit sharing agreement with Hindenburg Research, SEBI said.
In the notice issued to Hindenburg Research, where SEBI described the way the trading was done, it said that post publication of the report in January 2023 the FPI squared off its short position making significant profit of $22.25 million.
SEBI’s investigation showed that the short position by KIOF in Adani Enterprises futures were taken based on the draft of the Hindenburg report made available to it prior to it being made public.
The notice said the trades made by K India Opportunities Fund in Adani Enterprises were based on the advice of Kingdon Capital. Further, KMIL evaluated the advice receive from Kingdon Capital to check if the proposed investments were in line with strategy of the fund, permitted under SEBI’s FPI regulations.
KMIL had also shared an undertaking from Kingdon Capital that transactions recommended by it were as a principal for the master fund account and not as an agent, nominee, or trustee of any other entity. SEBI said Kingdon Capital was giving investment advice for trades of KIOF Class F without charging any fee to KMIL.
According to Kotak Bank’s FY23 annual report, Kotak Mahindra International acts as an investment manager to various funds which predominantly invest into equity and debt capital markets in India (including private equity strategies). It also carries on business in other financial services including dealing in securities on an execution-only basis, advisory services, distribution of various collective investment schemes and products of third parties.
Hindenburg Research, in its response to SEBI’s show-cause, said the notice had conspicuously failed to name Kotak 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.”
“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 hedge fund said.
