A foreign portfolio investor belonging to the Kotak group, K India Opportunities Fund Class F, traded in the futures of Adani Enterprises a few days prior to the publication of a report on Adani group by Hindenburg Research and Kotak Mahindra International Ltd, a subsidiary of Kotak Mahindra Bank, was the investment manager for the trades, a SEBI investigation document has showed.

K India Opportunities Fund Class F, managed by Kotak Mahindra International, is one of the noticees in a SEBI show cause issued to Hindenburg Research for violating Indian regulations last year, in the matter of shares of Adani Enterprises.

The trading decisions for the FPI were made by Kingdon Capital, the investment advisor to Kotak Mahindra International and a client of Hindenburg Research. The Sebi show cause notice contained all these disclosures. A link to the show cause notice was available on Hindenburg’s website.

In page 10 of the show-cause notice SEBI has mentioned the investment advisory agreement between Kingdon Capital and Kotak Mahindra International, which it subsequently referred to as KMIL.

In a clarification Kotak Mahindra Bank said, “K- India Opportunities Fund is a SEBI registered Foreign Portfolio Investor and is regulated by the Financial Services Commission of Mauritius. The Fund, was established in 2013 to enable foreign clients to invest in India. The Fund follows due KYC 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.”

“Kotak Mahindra International Limited (KMIL) and KIOF unequivocally state that Hindenburg has never been a client of the firm nor has it ever been an investor in the Fund. 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.“ It added that the transactions were made by the fund on the advice, and for the benefit, of its investor Kingdon Capital.

According to SEBI, Hindenburg Research had shared a draft of the report on the Adani Group with Kingdon Capital prior to its publication. Kingdon Capital is majority held by Mark Kingdon, who was also the ultimate beneficiary owner of an offshore master fund that subscribed to the shares of KIOF, which had taken short position in the futures of Adani Enterprises. Kingdon along with his family members had a 58.8 per cent beneficial interest in KIOF Class F.

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. It said 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.

“This shows that the FPI had advance knowledge of the timing of publication of the report,” the Sebi notice said. After the short positions were squared off the KIOF remitted $54 million to the master fund.

The report also mentioned that both Kingdon Capital and KIOF Class F were aware of the timing of the Hindenburg Report in advance.

Kotak Bank however said neither the fund nor KMIL were aware that Kingdon entities, had any association with Hindenburg and they had no prior knowledge of the publication of the Hindenburg report. “We deny any allegation of being aware of such report or acting in collusion in any manner with Kingdon or Hindenburg.”

KMIL had 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).

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. It did not specify who the ‘businessman’ was.

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