How A Kotak Mahindra Bank Fund Helped Make Rs 180-Crore Profit By Short Selling Adani Shares

Days ahead of the release of Hindenburg Report on Adani Group stocks, K India Opportunities Fund Ltd., or KIOF Class F opened a trading account, creating short positions which ultimately led to a profit of Rs 183.2 crore in a little over one month after the report was released.

The Securities and Exchange Board of India's investigation on the matter highlighted that the trades placed by the entity as 'short positions'— a derivatives strategy placed to capitalise on a potential downtrend in share prices—were discussed between Kingdom Capital Management LLC, a US-based investment advisor, and Kotak Mahindra Investments Ltd.

Kingdom Capital is owned by Mark E Kingdon, who is also the ultimate beneficial owner of Kingdon Offshore Master Fund, that is registered in the Cayman Islands.

K India Opportunities Fund - Class F is a SEBI registered category-1 foreign portfolio investor, which comprises of nine sub-funds, including KIOF Class F.

In a conversation held between employees of Kingdon Capital and senior executives of KMIL, SEBI highlighted urgency shown in activation of the trading account, and allocating $40 million to take positions exclusively in futures of a single stock—Adani Enterprises Ltd.

Kingdon Capital was passing on instructions with definitive trades and KMIL was just executing the instructions, though it was mandated to be an investment manager with discretion to decide upon the trades, SEBI said in its report, referring to Bloomberg chats between the two entities.

The FPI started trading in the futures of AEL from Jan. 10, 2023 and built short positions for 8.5 lakh shares just a few days before the release of the report, a SEBI release said, referring to KIOF Class F as the FPI.

The fund saw inflows of $40 million two weeks ahead of the report's release, of which $15 million were converted into Indian rupees, and transferred to the margin account for trading on Jan. 10, 2023, according to a release by the markets regulator. The trading account was activated in the derivatives segment subsequently.

"KIOF Class F traded only in the futures of AEL and not in any other Adani Group Companies. The entity did not trade in cash segment or options of any Adani Group Companies including AEL," SEBI's report said.

The FPI squared-off all its outstanding short positions in the January 2023 contract of AEL futures on Jan. 19, 2023 and Jan. 20, 2023 and created fresh short positions in the February 2023 contract on these two dates, SEBI stated.

Instead of squaring-off positions at the end of January, the FPI rolled them over from the January contract to February contract, just few days before the expiry of the January contract.

"The FPI expected to make profit from the anticipated price fall, on account of the impending release of the Hindenburg Report. This shows that the FPI had advance knowledge of the timing of publication of the report," SEBI said.

KIOF Class F stated squaring-off positions with effect from Feb. 1, 2023 and ultimately squared off its entire position by Feb. 22, 2023, at prices which had been deflated due to dissemination of the Hindenburg Report, SEBI stated.