On July 2, 2024, Kotak Mahindra Bank found itself entangled in a controversy involving Hindenburg Research and the Adani Group. The trouble began when Hindenburg Research, which is a US-based short-seller, accused India’s market regulator, the Securities and Exchange Board of India (SEBI) of trying to shield the private bank and other Indian entrepreneurs.
Hindenburg Responds to SEBI’s Notice
Hindenburg Research received a show-cause notice from SEBI. They received the notice for allegedly breaking Indian regulations. It mentioned how the firm traded and profited. Hindenburg claimed that SEBI did not reveal the involvement of a Kotak bank subsidiary’s fund in shorting Adani stocks.
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Kotak Mahindra Bank’s Reaction
Kotak Mahindra (International) Limited, which is a unit of Kotak Mahindra Bank, responded by stating that Hindenburg Research was never a client or investor in its K-India Opportunities Fund Limited. But they admitted that the fund had helped Kingdon Capital Management to short Adani Shares. The twist comes when they reveal that KCM is an investor associated with Hindenburg.
Bank Learns About Association Through Website
A Kotak Mahindra Bank executive revealed that the bank only learned about the connection between Hindenburg Research and Kingdon Capital after Hindenburg posted SEBI’s notice on its website. The executive said “Hindenburg has just thrown us under the bus by revealing our name.” and expressed his frustration.
Clarification from Kotak Mahindra (International)
Kotak Mahindra (International) Limited clarified that the fund was unaware of any involvement of Hindenburg with any of its investors. They also received confirmation from the fund’s investor that their investments were made as a principal and not on behalf of anyone else.
Impact on Kotak Shares
Following these developments, shares of Kotak Mahindra Bank dropped by about 2% in afternoon trading on the NSE. Even after this, the broader Nifty and Sensex indices remained nearly unchanged.
Hindenburg’s Allegations Against SEBI
Hindenburg accused SEBI of not disclosing Kotak Mahindra Bank’s role in the matter. They claimed that Kotak created and managed the offshore structure of Kingdon Capital to short Adani stocks.
Background on Hindenburg’s Report on Adani
In January 2023, Hindenburg published a report accusing Adani Group of stock manipulation and accounting fraud. This report led to a significant drop-in Adani group’s share price. The Supreme Court of India later ruled that Adani Group would not face further investigations beyond SEBI’s current probe.
Adani Group’s Position
The Adani Group suffered huge financial losses due to the Hindenburg report. They are continuing to deny any wrongdoing. Adani Group maintains that the report’s allegations are malicious. They are now focusing on rebuilding their market value and investor’s trust.
Details About K-India Opportunities Fund Limited
K-India Opportunities Fund Limited is a SEBI-registered foreign portfolio investor regulated by the Financial Services Commission of Mauritius. It was established in 2013 and the fund allows foreign clients to invest in India. Kotak Mahindra (International) Limited managed the fund, which opened a trading account under Kingdon Capital’s name. They traded Adani shares before and after the release of the Hindenburg report.
Kotak’s Compliance with Regulations
KMIL stated that it follows strict KYC procedures and adheres to all the applicable laws. They confirmed their co-operation with regulators regarding their operations.
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Questions from SEBI
SEBI’s investigation raised several critical questions LIKE:
- What was the source of the USD 40 million transferred to the fund for shorting Adani shares?
- Was profit the sole motive for Hindenburg and Kingdon Capital?
- Why didn’t Kotak suspect the large short positions in Adani shares?
- Were there more entities privy to the Hindenburg report before its public release?
- What penalties will SEBI impose on Hindenburg?
Next Steps
All the entities involved in this probe have been asked to respond to SEBI’s show-cause notice within 21 days. The investigation continues, as SEBI aims to determine the extent of the violations. They want to give appropriate penalties for those involved in this.
Challenges for Kotak Mahindra Bank
The recent controversy adds to Kotak Mahindra Bank’s challenges. Due to new RBI rules, Kotak Bank’s founder, Uday Kotak stepped down as managing director and CEO in September. This was four months before his term was going to end. In April, RBI barred the bank from onboarding new customers through online and mobile banking channels and issuing fresh credit cards. They gave that reason as “deficiencies in the bank’s IT system and non-compliance with corrective actions”.
This situation has put Kotak Mahindra Bank under increased regulatory scrutiny and added pressure to its operations.
About the Author
Mr. Radhesh Tarang Shah, is a management student at Institute of Management, Nirma University. He has a passion for writing articles and poems. He has experience as a financial analyst, author, news writer, marketer and social worker.
