India’s chase of foreign shorts hits close to home
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
By Una Galani, Shritama Bose
MUMBAI, July 3 (Reuters Breakingviews) -India’s securities regulator is going after the short sellers who bet against Gautam Adani’s infrastructure empire and triggered a $150 billion rout in the value of his companies. By doing so, however, it has cast a spotlight on the role played by Kotak Mahindra Bank KTKM.NS, a $42 billion Indian lender. It brings the scandal closer to home and is a reminder that pursuing sceptical investors typically backfires.
When Hindenburg Research targeted the tycoon’s group of listed companies in January 2023, it said it held short positions through U.S.-traded bonds and non-Indian-traded derivatives. Yet fresh details disclosed in a 46-page summons by the Securities and Exchange Board of India show how Hindenburg and a Wall Street fund manager, Kingdon Capital, profited from trading Indian futures of Adani Enterprises ADEL.NS.
The revelation makes Hindenburg’s disclaimers in its original report look disingenuous, which is ironic considering the firm criticised Adani for poor corporate disclosures, among other things. SEBI says Hindenburg showed the report to Kingdon before publication. The firm had agreed to hand 25% of profits it made from the trade to Hindenburg; those totalled $22 million by the time the investments were squared off in February 2023. Hindenburg admits its short position in Adani U.S. bonds was by comparison tiny and says SEBI identified “zero factual inaccuracies” in its research. Breakingviews was unable to reach Kingdon for comment.
While the two firms are out of SEBI’s reach, this is not the case for Kotak, which set up and oversaw the fund that Kingdon used to make the Indian trades. The regulator downplayed Kotak's role. Neither does SEBI detail how much money the bank made in fees from Kingdon.
Kotak says Hindenburg has never been a client, and its fund wasn’t aware of Hindenburg’s partnership with its investors. Ultimately, though, SEBI concludes the fund - in which Kingdon entities subsequently acquired a 100% economic interest - failed to do due diligence and engaged in fraudulent transactions by “effecting a scheme to share” profit from the trade with Hindenburg and by using research improperly.
Uday Kotak, whose shareholding in the lender makes him Asia’s richest banker, has a reputation that is hard for regulators to besmirch. He chaired a 2017 SEBI committee on corporate governance and was picked by New Delhi to manage the collapse of a large shadow bank the following year. He also dragged India’s central bank to court when it contested the size of his stake in the lender he founded; that fight ended in a settlement.
SEBI’s summons ought to embarrass Hindenburg. It also shows how one of India’s top private banks played a key role in a short attack that prompted a nationalist backlash and was portrayed as a global conspiracy against the country’s most important infrastructure tycoon. Going after overseas investors can hit closer to home.
Follow @ugalani and @ShritamaBose on X
CONTEXT NEWS
India’s securities regulator in a summons dated June 26 accused a fund set up and overseen by Kotak Mahindra Bank of failing to exercise due diligence and engaging in fraudulent transactions by facilitating a short trade targeting Adani Enterprises, part of the Adani infrastructure group, in collusion with Hindenburg Research.
The 46-page document from the Securities and Exchange Board of India (SEBI) accuses U.S. short seller Hindenburg Research and entities related to U.S. fund manager Mark Kingdon and Kingdon Capital of wrongdoing. Entities related to Kingdon had 100% economic interest in the Kotak fund.
Hindenburg’s report in January 2023 accused the Adani group of companies of fraud and wiped billions of dollars off their market values. Hindenburg published the SEBI summons on July 1, and said the regulator identified “zero factual inaccuracies” relating to its research. Adani has consistently denied any wrongdoing.
The Kotak fund held a 7% open interest on futures of Adani Enterprises prior to the publication of Hindenburg’s report. That short position was closed by February 22, 2023, generating about $22 million of profit for the entity after trading and legal expenses. Kingdon entities had an agreement to share 25% of its profits with Hindenburg, SEBI added.
Kotak said Hindenburg has never been a client of the fund, and the fund wasn’t aware Hindenburg was a partner of its investors, and that the firm will continue to cooperate with regulators. Breakingviews was unable to reach Kingdon for comment.
Adani's flagship stock has rebounded after short attack https://www.reuters.com/graphics/BRV-BRV/myvmaadqgvr/chart.png
Editing by Peter Thal Larsen and Katrina Hamlin
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