The Adani group denied all the allegations, but shareholders were rattled as the stock price tumbled over the next three months. The value of the 10 listed Adani Group entities declined by $150 billion in the three months after Hindenburg published its report.
According to the notice, Hindenburg inked an agreement with its investor, Kingdon Capital Management, in May 2021, twenty months before it published its report accusing Adani of stock manipulation and accounting fraud. According to the notice, Hindenburg made a profit from taking a short position in Adani.
Hindenburg responded to the notice on 1 July (US time), saying it had been aware that the Securities and Exchange Board of India had been grappling with how to respond to a US-based research firm with no presence or operations in India.
Mint looks at the key aspects of the latest Hindenburg post:
What is Sebi’s show-cause notice to Hindenburg all about?
The show-cause notice dated 26 June 2024 was sent to Hindenburg and Kingdon Capital Management, the only investor with which the US short seller shared the damning report on the Adani Group before publishing it.
The notice details how Hindenburg violated some regulations, including inadequate disclosures on how it traded and profited. It estimates Hindenburg made $14.7 million from taking a short position in Adani.
The 46-page notice, as shared by Hindenburg, states that the short seller’s report made some inaccurate statements to mislead readers and create panic among investors.
How has Hindenburg responded?
Hindenburg said on 1 July that the notice was “nonsense, concocted to serve a pre-ordained purpose: an attempt to silence and intimidate those who expose corruption and fraud perpetrated by the most powerful individuals in India.”
Hindenburg concluded that Sebi’s action was akin to shooting the messenger as the market regulator “seems more interested in pursuing those who expose such practices.”
Who was Hindenburg’s silent partner or investor?
US hedge fund Kingdon Capital Management was the investor that partnered with Hindenburg. Financier Mark Kingdon set up his firm in 1983. According to filings with the US market regulator, Kingdon Capital Management had $640 million in assets under management at the end of March 2024.
How much did Kingdon Capital and Hindenburg profit?
According to Sebi, Kingdon Capital Management was the only investor with which Hindenburg shared the report before it was published. Kingdon Capital Management made a profit of $22.11 million by trading in futures of Adani Enterprises Ltd shares.
Sebi estimates Hindenburg’s share totalled $5.53 million, or 25% of Kingdon Capital Management’s profit. From November 2022 to March 2023, Hindenburg incurred a loss of $5,197 from trading bonds of Adani Electricity Mumbai, Adani Green Energy, and Adani Ports and Special Economic Zone outside of India.
Hindenburg earned $9.2 million when it took short positions through exchange-traded funds and options on the MSCI India Index on 24 January 2023. Hindenburg’s total earnings, according to Sebi, were $14.7 million.
Hindenburg’s reply claims it made only $31,000.
What is the other important revelation in Hindenburg’s reply?
Hindeburg said Kotak Bank created and oversaw the offshore fund structure that Kingdon Capital Management used to profit from the trade. Sebi’s notice states only that K-India Opportunities Fund was the offshore entity that traded in futures of Adani Enterprises shares. Hindenburg said K-India Opportunities Fund stands for Kotak India Opportunities Fund.
How did Kotak India Opportunities Fund work?
Sebi said in the notice that the K-India Opportunities Fund Class F was registered on 4 March 2022, about 10 months before Hindenburg released its report in January 2023. According to Mint‘s review of the Mauritius company registry, K-India Opportunities Fund Class F was part of K-India Opportunities Fund, a Mauritius-based entity incorporated on 20 March 2013.
Sebi said K-India Opportunities Fund Class F had no “Participating Redeemable Shareholders.” Simply put, it was a shell entity.
On 20 November 2022, Hindenburg shared a draft report with Kingdon Capital Management. Hindenburg and Kingdon Capital Management signed an agreement about its work on 26 May 2021.
On 28 December 2022, a firm owned by Kingdon bought 100% of the shell company’s shares and started taking short positions on futures of Adani Enterprises shares on 10 January 2023.
How has Hindenburg’s latest salvo affected the Adani Group and the shares of its companies?
After it published its report in January 2013, the Adani Group cancelled a share sale by Adani Enterprises even as the value of all 10 group companies crashed by half over the next three months.
However, after Hindenburg’s latest statement, the shares of Adani Group companies were hardly changed. Shares of Kotak Bank, though, fell 2%.