Nearly a year and a half after US-based research firm Hindenburg published its report against the Adani Group, there has been a big development, this time from the side of market regulator SEBI. SEBI has sent a Show-cause Notice (SCN) to six entities in the Adani matter. The 46-page SCN has been sent in the procedure for holding an enquiry and imposing penalties in the matter of trading activities in the scrip of Adani Enterprises.
SEBI has sent SCN to Hindenburg Research (a US-based research firm which published the Hindenburg Report on January 25, 2023), Nathan Anderson Sole beneficial owner/shareholder of Hindenburg), Mark Kingdon (an individual who controlled/managed/owned Kingdon Capital, Kingdon Offshore Master Fund and K India Opportunities Fund).
According to SEBI’s investigation, concentration in short-selling activity was observed in derivatives of Adani Enterprises before the release of the Hindenburg report. K India Opportunities Fund opened a trading account just a few days before the publication of the Hindenburg report and then started trading in the scrip of Adani Enterprises. The fund squared off its short positions making a profit of ₹183 crore right after the release of the Hindenburg report.
SEBI initiated its investigation between the period November 1, 2022, to February 28, 2023. To determine the role of the notices, with respect to short-selling in Adani Enterprises prior to the release of the Hindenburg report in a planned manner, with prior knowledge of the release of the Hindenburg report, to ascertain whether there was any violation of the SEBI Act, SEBI PFUTP Regulations (Prevention Of Fraudulent and Unfair Trade Practices). SEBI also investigated any violation of SEBI Research Analysts Regulations since the research report was on Indian security.
WHO’S WHO IN THE ADANI-HINDENBURG MATTER?
Behind the KIOF Class F Fund, Mark Kingdon and Family were the ultimate beneficiaries having 58.8% investment. The Master Fund behind KIOF Class F Fund was again a pooled fund between Kingdon Associates, Kingdon Offshore and Kingdon Family Partnership. Mark Kingdon had the sole discretion of making the investment decision on investments including Adani Enterprises.
SEBI’s investigation revealed that Kingdon Capital and Master Fund KIOF Class F were all controlled/managed/owned by Mark Kingdon. Kingdon Capital entered into a research services agreement with Hinderburg that allowed them to have early access to research reports before they were made public so that it could make its investment decisions accordingly. Master Fund named KIOF (K-India Offshore Fund) Class F was created for taking positions on the basis of the Hindenburg report.
According to SEBI’s investigation, Kingdon Capital took confirmation from legal counsel, that it could enter into a research services agreement with a third-party firm that publicly releases short reports (in this case Hindenburg report against Adani Enterprises), pursuant to which Kingdon Capital would be given a draft copy of the report before its made public. It would have the opportunity to make its investments before the report is made public.
According to Kingdon’s submission, its actions did not violate United States law. SEBI in its SCN stated that the submission from Kingdon shows that Master Fund where the ultimate beneficiary was Mark Kingdon admitted to the intent of trading in India Securities based on a draft Hindenburg report on Adani.
As per SEBI, it also revealed that Master Fund proceeded to subscribe the PR shares of KIOF Class F and trade in Adani Enterprises Futures. SEBI states that a copy of the legal opinion relied upon by Mark Kingdon was not provided to SEBI when sought. SEBI has also stated that actions which contravene the Indian Law cannot be considered lawful only because they were carried out after obtaining a legal opinion.
As per the show-cause notice, Kingdon Capital had agreed to share 30% of its net profits from trading in researched securities with Hindenburg. Hindenburg was aware of the formation of the Master Fund to trade in securities of Adani Enterprises.
SEBI’s investigation also revealed that soon after the draft of the Hindenburg Report was shared with Kingdon Capital became a 100% beneficial owner of KIOF Class F Fund. An investment advisory Agreement was signed between Kingdon Capital and Kotak Mahindra (International).
Within a short period of receipt of the Hindenburg report, the Master Fund transferred $40 million to KIOF, out of which $15 million was transferred to the margin account for trading. Another $3 million was received by the Master Fund in the same way.
KIOF Class F built heavy short positions in just a few days before the release of the Hindenburg Report and squared off these positions after the release of the report. As per SEBI, the actions show that KIOF Class F had prior knowledge of the release of the Hindenburg report.
SEBI’s investigation also revealed that Kingdon Capital was the investment advisor to Kotak Mahindra International. The trades of KIOF Class F Fund were based on the investment advice of Kingdon Capital. Kotak Mahindra evaluated whether the investment advice from Kingdon Capital was in line with the strategy of the fund.
WHAT DID SEBI’S INVESTIGATION REVEAL ABOUT THE TRADING ACTIVITIES IN ADANI ENTERPRISES
KIOF Class F Fund traded only in futures of Adani Enterprises and not in other Adani Entities
KIOF Class F Fund built trading positions of 8.5 lakh shares just a few days before the release of the Hindenburg Report. The FPI’s open interest position in Adani Enterprises was 7% of the total Open Interest position.
KIOF Class F Fund squared off all positions in Adani Enterprises post-release of the Hindenburg report.
KIOF Class F Fund remitted $13 million and $41 million to the Master Fund.
The objective of the Master Fund was to generate short-term profit by trading in Adani Enterprises based on the contents of the Hindenburg report.
Kotak International shared an undertaking from Kingdon Capital that transactions recommended by Kingdon Capital were and are as principal for Master Account and not as an agent, nominee trustee or representative of any entity.
Kotak International was the investment manager for trades undertaken by KIOF Class F Fund.
Hindenburg was paid out of the profits made by Kingdon Capital on Adani Enterprises’ short sale.
Interestingly, Hindenburg denied any communication with Kingdon Capital regarding the Hindenburg report against Adani Group before its release. According to SEBI’s SCN, facts evidencing communication between Hindenburg and Kingdon Capital trades on the basis of such reports and timing of the release of the report, and statements from Hindenburg and Kingdon Capital indicate an attempt to conceal the evidence of collusion for profit.
According to SEBI SCN, a disclaimer on the Hindenburg report was also misleading as it stated it was only on valuations but spoke about floating stock, alleging price manipulation, and non-compliance with minimum public shareholding requirements.
SEBI also said that certain statements by Hindenburg cast aspersions on SEBI in a reckless and careless manner, based on anonymous sources and unreliable statements. According to SEBI, such statements affect market integrity by shaking the trust of investors in the regulatory framework.
Hindenburg in its report had said SEBI puts a blind eye on the actions of Adani making its money from the bribes. Hindenburg also stated that the whole system is working hand in glove and SEBI knows all about it. According to SEBI, the contents of the Hindenburg report further misrepresented the legitimacy of the legal process of settlement as government leniency.
VIOLATION OF SEBI FPI REGULATIONS
Kingdon Capital was aware of the misleading disclosure by the Hindenburg report which stated that the report was ‘solely on valuation of securities outside of India’ and that ‘Hindenburg had ‘taken a short position in Adani Group companies through US traded bonds and non-Indian securities’.
Another false disclosure came in from Hindenburg when it denied any communication with Kingdon Capital regarding Hindenburg’s report against Adani Group. According to SEBI, by becoming a party to these misleading disclosures, KIOF Class F failed to exercise due diligence and engaged in fraudulent transactions, which is a violation of SEBI FPI regulations.
UNFAIR TRADE PRACTICE
SEBI has alleged that Hindenburg colluded with Kingdon Entities in a scheme devised to use non-public information to build short positions and share profits from these trades.
SEBI has also alleged that Hindenburg and Kington Entities profited unlawfully from price deflated due to the publication of the Hindenburg report, without ensuring compliance with Research Advisor Regulations. According to SEBI, this is also constituted as unfair trade which prejudiced good faith dealing in Adani Enterprises by ordinary investors.
NON-DISCLOSURE FROM HINDENBURG
Another allegation from SEBI against Hindenburg has been on non-disclosure of financial interest in Adani Enterprises. SEBI’s investigation and the consequent show-cause notice also throw some very pertinent questions.
1) Master Fund which was a pooled fund of Kingdon Entities transferred $40 million to KIOF Class F Fund for taking short positions in Adani Enterprises. What was the source of these funds for Kingdon Capital?
2)Was profit the only motive for Hinderburg and Kingdon Capital through the creation short position in Adani Enterprises?
3)Why did Kotak Mahindra International not suspect such a large out-of-turn short position build-up in Adani Enterprises?
4) Hindenburg allegedly shared its report against Adani Enterprises with Kingdon Capital. Were there more entities with whom the same report was shared?
5) How much penalty or what action can SEBI take against Hindenburg?
SEBI, after considering the violations from Hindenburg and Kingdon Capital, has held the two entities in violation of SEBI Prevention of Fraudulent Trade Practices (PFUTP) Regulations, Research Analyst Regulations and Foreign Portfolio Investors (FPI) Regulations. All entities have been asked to reply to SEBI’s show-cause notice within 21 days from the receipt of the notice.
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