Why did Hindenburg name Uday Kotak in response to SEBI’s show cause notice?

SEBI’s notice to Hindenburg: The Securities and Exchange Board of India (SEBI) has issued a show cause notice to Hindenburg Research regarding a report alleging Adani group to be the ‘largest con in corporate history,’ in the aftermath of which the Adani Enterprise shares tumbled by close to 60 per cent.  In the notice, SEBI has outlined suspected violations by the research firm related to its short positions against the Adani Group last year. 

However, while responding to the allegations by the country’s securities and commodity market regulator, Hindenburg has accused SEBI of vaguely mentioning Kotak Mahindra Investments Limited as KMIL and not clearly highlighting its role in the dealings. 

Hindenburg in response to the notice said, “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.” 

Hindenburg shared that Kotak Mahindra Investments Limited “created and oversaw the offshore fund structure” used by Hindenburg’s investor partner to bet against Adani. The short seller alleged SEBI of masking Kotak’s name under the acronym ‘KMIL.’ Instead, it simply named the K-India Opportunities fund and masked the “Kotak” name with the acronym “KMIL”

Hindenburg, for the first time in its responses, named Uday Kotak, the founder and former CEO of the Kotak Mahindra Bank, suggesting that SEBI is trying to underplay the role of its former Corporate Governance Chief in the Adani short-selling bets to ‘protect yet another powerful Indian businessman’. 

“Uday Kotak, founder of the bank, personally led SEBI’s 2017 Committee on Corporate Governance. We suspect 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,” Hindenburg said. 

Hindenburg also mentioned that the Adani investigation was not justifiable from a financial or personal safety perspective for the research firm and the profits made by the firm in its Adani short positions was ‘barely breakeven’.  

“We have made ~$4.1 million in gross revenue through gains related to Adani shorts from that investor relationship. We made just ~$31,000 through our own short of Adani US bonds held into the report.” 

Hindenburg also cited the Adani research as “by far the work we are most proud of.” 

Hindenburg denies SEBI’s jurisdiction

Hindenburg also alleges SEBI of claiming jurisdiction over the research firm which it blatantly denied in the response. Hindenburg wrote, “Much of the notice seemed designed to imply that our legal and disclosed investment stance was something secret or insidious, or to advance novel legal arguments claiming jurisdiction over us.” 

Hindenburg made it clear that it neither has any operations in India nor any Indian entities, employees, or consultants, implying that the research firm does not fall in the jurisdiction of SEBI. 

Hindenburg also repudiated SEBI’s claim of the firm publishing a misleading disclaimer saying “Virtually everyone on earth knew we were short Adani because we prominently and repeatedly disclosed it.”