In a massive development, the Securities and Exchange Board of India has charged US short-seller Hindenburg Research with having made “unfair” profits through “collusion” involving “non-public” and “misleading” information to induce “panic selling” in Adani Group stocks. Elaborating on its allegations, SEBI sent a detailed 46-page show-cause notice, spelling out the events leading up to a massive $150 billion loss in the market value of Adani Group’s ten listed firms.
According to SEBI, Hindenburg shared a preliminary copy of its damaging report on Adani with New York-based hedge fund manager Mark Kingdon some two months before it was due to be published. This allowed him to profit from the market storm after publication that was analyzed by Kingdon.
The SEBI notice has pointed out coordination between Hindenburg, Kingdon, and a broker of Kotak Mahindra Bank to execute the event and reap profits from the subsequent market turmoil. Hindenburg released its damning report on January 24, 2023, in which it labeled the Adani Group as pulling off the “largest con in corporate history.” This caused the stock prices of Adani Enterprises Ltd (AEL) to slump by about 59% from January 24 to February 22, 2023.
Crucially, time-stamped chats between one employee of Kingdon’s hedge fund and traders from Kotak Mahindra Investments Ltd, a Mauritius-based subsidiary of Kotak Mahindra Bank, form part of SEBI’s evidence in the case. The communications show the coordination in selling future contracts in AEL, which had an amplified market effect. SEBI further goes on to show that Kingdon never declared any relationship with Hindenburg nor acted upon any price-sensitive information coming from Hindenburg.
The SEBI probe, which reportedly covered 13 shadowy offshore entities holding large stakes in Adani stocks, has also drawn attention to a profit-sharing arrangement between Kingdon and Hindenburg. Kingdon’s K-India Opportunities Fund Ltd took short positions in AEL and made a net profit of $22.11 million, after deduction of legal costs, according to the same source.
Commenting further, Hindenburg responded that SEBI’s notice is an attempt to “silence and intimidate” those exposing corruption. It further disclosed that the vehicle in which it made the bets against Adani’s flagship company is owned by KMIL. They also alleged that SEBI did not focus its investigation on the allegations in the January 2023 report, and this was “ostensibly an attempt by the Adani Group to create offshore shell entities for moving billions of dollars surreptitiously”.
Kingdon Capital is on defense and pleads that it was legally entitled to form an agreement with a third-party company, such as Hindenburg, which was to supply research. This allowed them to receive a draft of the Hindenburg report in advance so that they could make relevant investments based on it.
The notice from SEBI is just a precursor to possible formal legal proceedings, ending with financial penalties and restriction of participation in the markets. Based on SEBI should there be a hindrance, it might even seek government help in geo-blocking Hindenburg’s website in India.
There are, of course, political undertones to the case as well. Senior advocate Mahesh Jethmalani, who is expected to bat for the Adani Group, accused Mark Kingdon of links to a “Chinese spy”, thus muddying the story. According to Jethmalani, Kingdon—along with his wife Anla Cheng—was involved in the execution of the short-selling plan against Adani.
SEBI has asked Hindenburg to respond to the allegations that have been submitted within 21 days. In its published response, Hindenburg persisted that it just made $4.1 million off its positions in Adani stocks and criticized SEBI for failing to name Kotak Bank, facilitating the offshore fund structure used for its short-selling strategy.
Should it unravel, this case could have major implications for market regulation in emerging markets, especially India, and for the supervision of offshore entities within the country’s markets.