The latest twist to the Adani-Hindenburg saga is Kotak Mahindra group’s involvement that no one knew till the US short seller revealed that Kotak-owned, Mauritius based entity K-India Opportunities fund (KIOF) created and oversaw the offshore fund that was used by Hindenburg’s partner to short Adani shared that triggered a sell-off in Adani shares in January, 2023.
This update came a year later the short-seller alleged Adani for pulling off the largest con in corporate history. In response, Kotak said its Mauritius fund or Kotak Mahindra International Ltd (KMIL) were never aware of Hindenburg’s association with the investor Kingdon.
This is the full text of Kotak Group’s response to media: “
“K- India Opportunities Fund Ltd. (KIOF) is a SEBI registered Foreign Portfolio Investor and is regulated by the Financial Services Commission of Mauritius. The Fund, was established in 2013 to enable foreign clients to invest in India. The Fund follows due KYC procedures while onboarding clients and all its investments are made in accordance with all applicable laws. We have cooperated with regulators in relation to our operations and continue to do so.
Kotak Mahindra International Limited (KMIL) and KIOF unequivocally state that Hindenburg has never been a client of the firm nor has it ever been an investor in the Fund. The Fund was never aware that Hindenburg was a partner of any of its investors. KMIL has also received a confirmation and declaration from the Fund’s investor that its investments were made as a principal and not on behalf of any other person.”
To be sure, Kotak Group acting as a banker for Hindenburg’s partner investor may be perfecrtly within law. But Kotak’s claim that its group subsidiary KMIL or KIOF the fund managed by KMIL was unaware of Hindenburg association with one of its prominent investors, who made a fortune shorting Adani’s share last year, is a bit surprising. A banker to such a deal typically goes to the roots of investors and identify the nuances before engaging formally, especially when the transaction involved one of the biggest corporate groups. It’s strange that how couldn’t KIOF know the whereabouts of the partner of the investor?
According to Sebi’s notice, an initial analysis by the markets regulator on trading immediately prior to the period of releasing the report and immediately afterward showed that KIOF opened a trading account and started trading in the futures of the scrip of Adani Enterprises Ltd (AEL) just a few days prior to the release of the report and squared off the position after the release of the report, making Rs183 crore profits (or $22.25 million.)
Following this, Sebi started an investigation for the period November 1, 2022 and February 28, 2023 on the nature of these transactions linked to the release of Hindenburg report and role of noticees. In fact, among the parties to which Sebi show cause notice has been served (Hindenburg Research LLC, Nathan Anderson, Mark E Kingdon, Kingdon Capital Management, Kindgdon Offshore Master Fund, KIOF), only KIOF has any direct connect to India and hence under Sebi’s jurisdiction.
This is the reason why Hindenburg, in its latest update, questioned Sebi’s omission of naming Kotak. “While SEBI seemingly tied itself in knots to claim jurisdiction over us, its notice conspicuously failed to name the party that has 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’,” Hindenburg said.
Further, Hindenburg has alleged that it suspects SEBI’s lack of mention of Kotak or any other Kotak board member may be meant to protect yet another powerful Indian businessman from the prospect of scrutiny, a role SEBI seems to embrace. The shortseller also noted that Uday Kotak, founder of the bank, personally led SEBI’s 2017 Committee on Corporate Governance.
Legal battle with RBI
Kotak Group has a history on taking on regulators, including banking regulator Reserve Bank of India (RBI). In 2020, Kotak had dragged the RBI to court over promoter stake holding in the bank. The RBI had stipulated that Kotak had to pare his promoter holding below 20 percent before December 31, 2018 from around 30 percent. To achieve compliance, in August 2018, the bank announced the completion of perpetual noncumulative preference share issue (PNCPS), which it interpreted as cutting the promoter stake to 19.7 percent. The bank had claimed that it was complying with the RBI licensing norms through this deal.
But that didn’t satisfy the regulator. The RBI said preference share allotment route wasn’t sufficient to meet the requirements laid out by the promoter stake dilution guidelines. The bank argued that PNCPS was part of the paid-up capital. With the impasse continuing and the deadline for stake dilution getting closer, Kotak Mahindra Bank moved the Bombay High Court. The RBI eventually allowed retention of up to 26 percent promoter stake with some riders.
The RBI said the promoters, Uday Kotak and family, while retaining a 26 percent stake, need to cap the voting rights at 15 percent by April. The lender withdrew the case subsequently and some interpreted this as a win for Uday Kotak.
Why did the RBI agree to settle with Kotak outside the court? There is no clarity on this yet.
Only banker who contributed to electoral bonds
Uday Kotak, unlike other career bankers, is seen more closer to the political power centres in New Delhi. One must recall that Infina Finance, one of the promoter group entities of Kotak Mahindra Bank, had donated through electoral bonds worth Rs 60 crore to the BJP.
Who owns Infina Finance? Infina Finance is jointly owned by Kotak Mahindra Bank through its subsidiary and Kotak family. As per the shareholding data with the BSE, as of March 2024, the promoter and promoter group entities hold a 25.89 per cent stake in Kotak Mahindra Bank. Uday Kotak is the promoter and single largest shareholder of Kotak Mahindra Bank, with a 25.71 per cent stake. The remaining 0.18 per cent stake is held by other promoter group entities.
Infina Finance donated electoral bonds worth Rs 60 crore to the Bharatiya Janata Party (BJP). The NBFC firm purchased these bonds in the denomination of Rs 1 crore in 2019, 2020 and 2021, according to the data given by the State Bank of India (SBI) to the Election Commission. Kotak stepped down as CEO on September 1, 2023. But, he remains a formidable force in the bank.