Hindenburg Research released report on Adani to client two months ahead of publishing that led to short-selling event: SEBI

SEBI issued a show cause notice to Hindenburg Research, detailing how the short seller, the New York-based hedge fund, and a broker associated with Kotak Mahindra Bank benefitted from the over $150 billion decline in market value of the 10 listed Adani Group companies following the report's release.

SEBI has accused Hindenburg of making “unfair” profits through “collusion” by using insider and “misleading” information to induce mass “panic selling” of Adani Group stocks.

“Prior to the release of the Hindenburg Report, concentration in short-selling activity was observed in the derivatives of Adani Enterprises Ltd,” said SEBI, reported Mint.

Since the release of the report, Adani Enterprises shares fell nearly 59 per cent from January 24th to February 22nd, 2023. The share price fell to Rs 1,404 from Rs 3,422 per share.

SEBI also reported that the K-India Opportunities Fund Ltd - Class F (KIOF Class F) opened a trading account and began trading in the shares of Adani Enterprises a few days before the report was published. After the report was released, the fund squared off its short positions, making a total profit of Rs 183.23 crore or $22.25 million, according to the report

“The net profit after trading and legal expenses comes to USD 22.11 million,” said SEBI.

As a part of the deal, Kingdon owed $5.5 million to Hindenburg, out of which $4.1 million has already been paid, as of June 1st, said SEBI in the notice.

Kingdon Capital responded to SEBI stating that it had a legal option to enter into a research services agreement with a third-party firm that publicly releases short reports on companies.

According to this agreement, Kingdon Capital would receive a draft copy of the report before its public release, allowing them the option to invest beforehand.

Hindenburg's response on SEBI's allegations

Hindenburg stated that it made $4.1 million from its positions on Adani Group stocks and criticized SEBI for ignoring the "evidence" provided in the January 2023 report, which alleged that the Adani conglomerate operated a large network of offshore shell companies to move billions of dollars in and out of its private and public companies.

Hindenburg also claimed that SEBI was overreaching by trying to assert jurisdiction over a US-based investor and pointed out that SEBI had failed to name the actual company tied to Kotak Mahindra Bank, instead using the acronym "KMIL."

Hindenburg's response to the show cause notice was that it was an attempt to silence and intimidate those exposing corruption and fraud by powerful individuals in India.

The short seller revealed that the vehicle used to bet against Adani Enterprises Limited belonged to Kotak Mahindra (International) Limited (KMIL), a Mauritius-based subsidiary of Kotak Mahindra Bank Limited. This subsidiary placed bets against Adani Enterprises for its client, Kingdon Capital Management, run by Mark Kingdon.

The SEBI notice included timestamped chats between a hedge fund employee and KMIL traders about selling future contracts of Adani Enterprises.

PTI reported that Kotak Mahindra Bank stated that Kingdon "never disclosed that they had any relationship with Hindenburg nor that they were acting on the basis of any price-sensitive information."

Can SEBI ban Hindenburg ?

A SEBI show cause notice is usually issued before any legal action is taken, which may involve a financial penalty and potentially a ban from trading in Indian financial markets.

SEBI, backed by the Indian government, could also geo-block the research firm's website, according to Mint.

Hindenburg has been given 21 days to respond to the allegations.