If we had assumed that the Adani-Hindenburg battle was over, it has instead turned into a full-blown war. This time, one side has changed as SEBI has entered with a third angle and the primary one, changing it to SEBI-Hindenburg as Adani slides into the background and looks on.

The last couple of days have witnessed a showdown between SEBI and the American researcher and short-seller Hindenburg, as SEBI issued a notice to Hindenburg; the latter is fully aware of the fact that it perhaps is out of the “jurisdiction” of SEBI, pointing a classy finger and went on to post the notice.

However, it did not stop there. It further went on to “blast” SEBI, stating that the regulator was not competent in regulating the local corporates and was instead targeting Hindenburg for pointing out irregularities.

It further asserted that it would go the RTI route to get details of what actually transpired behind closed doors in multiple meetings between Adani officials and the market regulator.

However, that perhaps is a bit of a stretch even for Hindenburg as it is aware that getting the details of the meetings is almost next to impossible just as SEBI is aware that besides issuing a notice there is little that it can do, hence on this front its checkmate!

The Hidden Entity

As the skirmish between Adani and Hindenburg persisted intermittently, an unforeseen revelation surfaced: Uday Kotak’s Kotak Mahindra Bank had devised and managed the offshore fund structure used by one of its investor partners for Adani stock trades prior to the release of the Hindenburg report last January.

The allegations emerged after the Securities and Exchange Board of India (SEBI) issued a show-cause notice on June 27 to six entities, including K India Opportunities Fund (KIOF), a SEBI- and RBI-registered foreign portfolio investor (FPI) managed by Kotak Mahindra International.

According to the SEBI notice, Hindenburg allegedly facilitated Kingdon Capital in establishing K India Opportunities Fund to create short positions in Adani stocks ahead of the Hindenburg report.

On January 9, 2023, a Master Fund owned by Mark Kingdon transferred $40 million to KIOF, of which $15 million was converted into rupees and used as margin to take short positions on Adani Enterprises futures.

SEBI states that these positions were squared off in February 2023, resulting in a profit of $22.25 million.

In response, Kotak Mahindra International asserted in an exchange filing that Kingdon informed them the transactions were made on a principal basis, i.e., for themselves.

“Kingdon never disclosed any relationship with Hindenburg nor indicated they were acting on any price-sensitive information,” the statement read.

Kotak’s Strategy

According to the show-cause notice, SEBI detailed that on January 20, 2023, KIOF built a short position of 850,000 shares in Adani Enterprises futures. Between February 1 and 22, 2023, these positions were squared off, generating a profit of ₹183 crore.

Following the report’s release, Adani Enterprises’ stock plummeted by 59% between January 24 and February 22, 2023.

SEBI accused KIOF of being aware of the timing of the Hindenburg report’s public release and strategically planning the short sale.

“By orchestrating a scheme to share profits from trades in Indian listed companies with Hindenburg, based on the knowledge of the report’s timing through Kingdon Capital, and failing to ensure compliance with RA Regulations, KIOF engaged in fraudulent transactions, violating SEBI FPI regulations,” the show-cause notice stated.

In response, Kotak stated,

“Neither the Fund nor KMIL were aware that Kingdon entities, which include a US SEC registered investment advisor, had any association with Hindenburg. The Fund and KMIL had no prior knowledge of the publication of the Hindenburg report.”

On the other hand, Hindenburg, in its blog, criticized the market regulator for omitting Kotak Mahindra Bank in the show-cause notice.

“While SEBI seemingly tied itself in knots to claim jurisdiction over us, its notice conspicuously failed to name the party with an actual tie to India: Kotak 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. Instead, it simply named the K-India Opportunities Fund and masked the ‘Kotak’ name with the acronym ‘KMIL’.”

The Game and Twisted Rules

It’s clear that rules were bent, if not outright broken.

The offshore firm did not collaborate with any SEBI-regulated local research analysts in producing its detailed and compelling report on Adani, which accused the company of price manipulation and accounting fraud, despite much of the content being derived from publicly available information.

Instead of charging a plain fee for its research, it entered a profit-sharing arrangement with Kingdon, a Cayman Islands-based investor, which took short futures positions in Adani’s flagship stock.

The trades by Kingdon highlighted Kotak’s role—an interesting revelation from Hindenburg’s outburst on Tuesday. Since Kingdon is an overseas firm not regulated in India, it used a Kotak entity, a Mauritius-incorporated foreign portfolio investor (FPI) registered with SEBI, to execute the trades.

SEBI suspects that Kotak, which handled the hastily organized trades, was aware of the contents of the unpublished Hindenburg report, the timing of its release, and the potential market disruption it would cause.

These are ‘non-public information’ (NPI) as opposed to ‘unpublished price-sensitive information’ (UPSI), a more familiar term in equity market stories about price manipulation and insider trading.

Technically, an FPI does not question the trades of its investors. However, if Kotak, as a fund vehicle and custodian, had knowingly facilitated these Kingdon trades, it (according to SEBI) violated fund regulations and the code of conduct.

But was Kotak in possession of the NPI?

That’s for SEBI to prove, although Kotak denied any awareness of Hindenburg’s deal with Kingdon.

Based on its findings, SEBI had questioned Adani about related party transactions and inadequate disclosures, though many might see this as a mere slap on the wrist.

The Bottom Line, Adani-Hindenburg-SEBI-Kotak

Corporate dealings are rarely purely black and white; they often inhabit shades of grey, and this reality is common across countries and industries.

The Hindenburg report, regardless of the debate over its targeted nature, shone the long-suspected suspicious dealings of a major conglomerate.

Adani Group has faced various allegations over the years. Critics have accused the Modi government of favoritism, pointing to rapid clearances for mega projects and the expanding influence of the Adani and Ambani empires.

Moreover, SEBI’s lapses in regulatory oversight have raised questions about the integrity of corporate governance in India.

These issues are extremely important and show a broader truth: Indian corporate dealings frequently operate in these unclear grey areas rather than clear-cut ethical lines, and the controversy surrounding the Hindenburg report spotlights these shades of grey.

What it did was that it brought to the forefront the challenge of determining ethical boundaries in an arena where business and politics are often intertwined.

The situation forces many to consider which side they align with—those advocating for stricter transparency and accountability or those who operate within the flexible interpretations of regulations.

The bottom line is that the Adani episode is a reminder that corporate governance is not just a matter of adhering to rules but also about maintaining ethical standards.

In a world where grey areas dominate, the choices made by companies, regulators, and investors shape the business environment and public trust.

The question remains: will the pursuit of profit continue to overshadow ethical considerations, or will this scrutiny prompt a shift towards greater transparency and integrity in Indian corporate dealings?

For SEBI, though, in the present, Hindenburg’s surprising counterattack could make the closure of the Adani story more complicated than SEBI anticipated.