Kotak Mahindra Bank is evaluating if Kingdon Capital misled it over its links to Hindenburg Research which, in a scathing report in January last year accused the Adani group of corporate governance lapses and market manipulation, said people privy to the development.
According to the persons cited above, the bank which has received a show-cause notice from the markets regulator Securities and Exchanges board of India (Sebi) for facilitating a Foreign Portfolio Investor (FPI) licence for Kingdon Capital, is also examining if the declarations made by Kingdon were misleading. Kingdon has claimed that all its trades in Adani group entities were “principal trades”. Under current regulations, off-shore funds such as Kingdon Capital are only permitted to undertake proprietary trades and cannot invest on behalf of any third party.
“Based on the evaluation, Kotak will take a call on whether it wants to initiate legal proceedings against Kingdon,” one of the sources cited above said. Notably, a Sebi probe has found that Kingdon Capital had a profit sharing agreement with Hindenburg Research and hence part of the money funnelled into the trades was on behalf of the US-based short-seller,. Thus, Kingdon’s trades may have been—at least partly—on behalf on Hindenburg and thus may not have been principal trades.
Emails sent to Kotak Mahindra Bank and Kingdon Capital remained unanswered till the time of filing this story.
According to the showcause notice sent by Sebi to Hindenburg – which the US based short seller made public – Kingdon Capital had purchased an entity with a Foreign Portfolio Investor (FPI) licence created by a subsidiary of Kotak and used this entity to take short positions in Adani Enterprises.
“The fund was well aware if they disclosed the relationship between them and Hindenburg, Kotak wouldn’t have set up the FPI account since only principal trades are allowed and hence there is a view that Kingdon deliberately kept these links a secret,” said one of the sources cited above.
“In fact, Kingdon made declarations saying these were principal trades. These issues have to be carefully analysed and based on the evaluation, Kotak will explore its legal options,” the source said.
Moneycontrol reported on July 4 that instead of taking a fresh licence, which would have taken Kingdon Capital at least a month, Kotak Mahindra Bank’s subsidiary firm offered it a readymade structure in Mauritius, which was registered as an FPI with Sebi since March 2022.
The development assumes significance as Kotak Mahindra Bank has unexpectedly found itself embroiled in the Adani-Hindenburg saga after the Sebi show-cause notice went public. On Tuesday, the shares of Kotak Mahindra Bank fell as much as 4 percent intraday.
The subsidiary of Kotak Mahindra Bank, which is the FPI entity at the heart of the Sebi action, and Kingdon Capital are signatories to an agreement. Legal experts say litigation arising out of alleged contractual breaches may have to go through the arbitration process at a venue/court specified in the agreement. However, if there is any element of fraud, then it becomes a criminal matter and Kotak can sidestep the arbitration and move a court.
“The case can be filed both in India where the transaction was executed or in the US where Kingdon is based out of and Kotak can claim damages also in such a scenario,” said a leading securities lawyer.
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