MUMBAI
:
Kotak Mahindra (International) Ltd, a unit of Kotak Mahindra Bank Ltd, said on Tuesday that Hindenburg Research has never been a client or investor in its K-India Opportunities Fund Ltd, which facilitated the shorting of Adani shares for Kingdon Capital Management, an investor partner of the US-based short seller.
“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,” said a spokesperson at Kotak Mahindra (International) Ltd in a statement.
The clarification comes after the US-based short seller revealed that it had received a show cause notice from the Securities and Exchange Board of India (Sebi) on the shorting of Adani shares.
Hindenburg revelations
In its response to the Sebi notice, Hindenburg said the markets regulator failed to disclose Kotak Mahindra Bank’s role in the matter, claiming that the Indian bank oversaw the offshore structure used by Kingdon Capital to short Adani stocks.
“While Sebi seemingly tied itself in knots to claim jurisdiction over us (Hindenburg), its notice conspicuously failed to name the party that has an actual tie to India: Kotak (Mahindra) 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,” the short seller said. “Instead, it simply named the K-India Opportunities Fund and masked the ‘Kotak’ name with the acronym ‘KMIL’.”
Hindenburg also alleged that Sebi’s omission of Kotak’s name may be meant to protect the businessman from scrutiny.
The fund in question
K-India Opportunities Fund Ltd is a Sebi registered foreign portfolio Investor, regulated by the Financial Services Commission of Mauritius. The fund was established in 2013 to enable foreign clients to invest in India.
The bank’s international subsidiary Kotak Mahindra (International) Ltd, which acted as the investment manager to the fund, opened a trading account under Kingdon Capital’s name and started trading in Adani shares a few days before the release of the Hindenburg report and then squared off its entire short position post the publication of the report.
According to a Kotak Mahindra Bank executive, who spoke to Mint on the condition of anonymity, the bank learnt about the association between Hindenburg Research and Kingdon Capital after Hindenburg posted a copy of Sebi’s 26 June notice on its website on Tuesday.
“Hindenburg has just thrown us under the bus by revealing our name,” the official said.
“If a fund manager of a stock that is trading at 200 times price to equity, decides to sell, how are we supposed to know it is a manipulative trade,” the excutive said.
“KMIL is the largest fund manager for India and any large global investor will naturally look at us,” he added.
KMIL further clarified that the fund follows due KYC (know your customer) 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, it said.
Kotak shares were down over 2% at the press time.
The Hindenburg-Adani saga
On 24 January 2023, Hindenburg Research published a report accusing Adani group companies of stock manipulation and accounting fraud, ahead of a proposed ₹20,000 crore share sale by Adani Enterprises Ltd. This resulted in a $150 billion meltdown in shares of Adani’s publicly listed companies, even as the conglomerate termed the report malicious and baseless.
Meanwhile in January this year, the Supreme Court ruled that the conglomerate will not face further investigations beyond Sebi’s current scrutiny. The markets regulator has been probing the Adani Group for tax haven use and stock manipulation.
The latest twist in the Adani-Hindenburg saga couldn’t have come at a worse time for Kotak Mahindra Bank that has been under the regulatory lens over the last few months.
“It looks like Kotak is walking on eggshells all the time,” the official added.
On 1 September 2023, the bank’s founder Uday Kotak stepped down as managing director and chief executive, four months before his term ended.
The Reserve Bank of India’s (RBI’s) April 2021 norms on corporate governance in private sector banks capped maximum tenure of promoters who are MD & CEO at not more than 12 years, with an option to extend it to 15 years with the discretion of the banking regulator.
Kotak is currently serving as the non-independent director on the bank’s board.
Then in April this year, the RBI stopped the bank from onboarding new customers through its online and mobile banking channels and barred it from issuing fresh credit cards immediately.
The central bank found deficiencies and non-compliances in the bank’s IT system and its “continuous failure to comply with the RBI’s corrective action plan.”