From A Foreign Investor To A Kotak Bank Fund: How The Adani Stocks Short Sell Happened

Uday Kotak founded Kotak Mahindra Bank, and its brokerage firm are in the news after US short-seller Hindenburg Research called out the market regulator for failing to address the alleged fraud.

In a response to the market regulator's show cause notice, the short seller said that the investigations had "masked the Kotak" name, which created and oversaw the offshore fund structure used by the short seller.

The Securities Exchange Board of India's notice "conspicuously failed to name the party that has an actual tie to India: Kotak Bank," Hindenburg said. Instead, it simply named the K-India Opportunities Fund and masked the “Kotak” name with the acronym “KMIL”, the research firm said.

KMIL is the abbreviation for Kotak Mahindra Investment Ltd., an asset management company owned by the Kotak Group.

SEBI has alleged that foreign portfolio investor Kingdon Capital Management LLC and its entities aided Hindenburg to indirectly participate in the shorting of Adani Enterprises Ltd.'s futures contracts.

SEBI's investigation found that Hindenburg conspired with Mark Kingdon and his entities in a scheme devised to use knowledge of non-public information to build short positions.

Mark Kingdon owned and controlled Kingdon Capital Management LLC, M Kingdon Offshore Master Fund, and K India Opportunities Fund–Class F (KIOF–Class F).

KIOF-Cass F was registered with the regulator as a foreign portfolio investor. The master fund owned by Mark Kingdon started the process of subscribing to the preferential redeemable shares of KIOF class F after receiving the draft of the Hindenburg report against Adani Group.

This is where Uday Kotak firm's involvement comes in, as KMIL entered into an investment advisory agreement with Kingdon Capital. Further, a subscription agreement was entered between the master fund and KIOF.

The master fund then transferred $40 million to KIOF, after which a short position of 8,50,000 shares in Adani Enterprises was built.

After the public release of the report that triggered a fall in the scrip of the Adani company, the KIOF class F made a total profit of Rs 183.24 crore, SEBI said in the notice.

The US shortseller suspects that SEBI’s lack of mention of Kotak or any other Kotak board member may be meant to "protect yet another powerful Indian businessman from the prospect of scrutiny."

According to the research agreement, Kingdon Capital agreed to share 25% of the profit instead of 30%, as agreed in the research report.