Kotak Bank Under Regulatory Microscope for Adani Short Selling Scheme

A recent revelation points to Kotak Mahindra Bank’s involvement in the creation and management of a fund used to short sell shares of Adani Enterprises.

Kotak Bank Scrutinized for Adani Short Selling
Credit: tosshub.com

This maneuver came ahead of a damaging report by Hindenburg Research, leading to significant losses for Adani’s stock.


Offshore Maneuvers and Market Implications

On a normal trading day turned turbulent, Kotak Mahindra Bank found itself amid controversy. Hindenburg Research unveiled that the bank established an offshore fund structure for its partner investors to bet against Adani stocks.

This claim surfaced after India’s market watchdog, the Securities and Exchange Board of India (Sebi), dispatched a show-cause notice to entities including Kotak Mahindra related foreign portfolio investor K India Opportunities Fund (KIOF).

Sebi’s notice detailed that an amount of $40 million was funneled to KIOF by Master Fund, maintained by Mark Kingdon, on January 9, 2023.

A fraction of this, $15 million, was then converted to rupees, providing margin to short Adani Enterprises futures. The short positions were later settled in February, earning a profit of $22.25 million.


Regulatory Scrutiny and Responses

Amid fluctuating shares, the regulator put the spotlight on the timing of these trades. Sebi claimed that KIOF anticipated the release of the Hindenburg report, thus planning the short sale in advance.

This action suggested a lack of due diligence and pointed to fraudulent transactions, a contravention of Sebi’s foreign portfolio investor regulations.

In defense, Kotak Mahindra Bank responded that neither the fund nor its international branch, Kotak Mahindra International Limited (KMIL), had prior knowledge of or association with Hindenburg’s research or report.

In a statement, Kotai reiterated that investor Kingdon had not disclosed any information regarding their relationship with Hindenburg or their act based on insider knowledge.


Market Reaction and Analysis

Following these allegations, Kotak Mahindra Bank’s share price saw a downturn, dropping by as much as 4% intraday. The bank’s refusal to comment specifically on ET’s queries but shared in an exchange filing that transactions by Kingdon were done solely for themselves and without any wrongful knowledge.

Meanwhile, Hindenburg Research criticized the Indian regulator for failing to explicitly name Kotak Bank in its notice. They argued that the bank, having established and overseen the fund used for these trades, should be at the forefront of the inquiry.


Moving Forward

As the story unfolds, Kotak Mahindra Bank faces heightened scrutiny from regulatory bodies and investors.

The situation underscores the intricate webs of international finance and the role of vigilance in trading practices. With the Sebi notice out in the public domain, further developments are yet to surface as to how this will affect Kotak Mahindra Bank and the broader market in the future.

This case study will potentially serve as a precedent for international and domestic regulations surrounding offshore funding and short selling operations.

The financial community now watches closely, awaiting responses from the involved entities and further clarification from the regulatory authorities.


In Conclusion

The Kotak Mahindra Bank controversy brings to light the complexities present in global finance. As regulators, financial institutions, and investors grapple with the repercussions, it reminds the market of the thin line between strategy and regulation.

The bank now proceeds with caution, as it navigates through the regulatory landscape shaped by its alleged betting against one of India’s largest conglomerates.

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