Billionaire banker Uday Kotak founded bank and brokerage created and oversaw an offshore fund used by an unnamed investor to profit from a plunge in Adani shares that followed a damning Hindenburg report, the US short-seller said.

Hindenburg Research, which had in a January 2023 report alleged stock market manipulations and accounting fraud at the Adani group, said it has received a show cause notice from the Indian markets regulator Securities and Exchange Board of India's (Sebi) over gains made from betting on the conglomerate's shares.

The US short-seller said it had disclosed that it had bets against the group, adding that its gains were only over USD 4 million.

While Kotak Mahindra Investments Ltd (KMIL) -- the asset management company is said to have created the offshore fund -- stated that Hindenburg was "never" its client, Sebi's show cause notice cited chats between Kingdon Capital -- a client of the US short-seller who was privy to the report prior to its release -- and Kotak fund executives.

Kingdon Capital subscribed to shares of KIOF Class F, an FPI of KMIL, Sebi said adding that KIOF built short positions on 8.5 lakh shares in futures of Adani Enterprises Ltd and squared off this post report release to make "a total profit of Rs 183.24 crore (USD 22.25 million)".

"K-India Opportunities Fund Ltd (KIOF) is a Sebi-registered foreign portfolio investor (FPI) and is regulated by the Financial Services Commission of Mauritius," a KMIL spokesperson said.

"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." The spokesperson went on to state that "Hindenburg has never been a client" of KMIL or KIOF.

"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." Calling the Sebi show cause notice as attempted intimidation, Hindenburg asked why the market regulator did not name Kotak.

Sebi's 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," Hindenburg said.

Instead, the regulator simply named the K-India Opportunities fund and "masked the 'Kotak' name with the acronym 'KMIL'," it added.

The January 2023 report, that led to a rout in Adani shares that at one point saw more than USD 150 billion being wiped out from market value of the 10 listed companies, earned a gross revenue of about USD 4.1 million through gains related short positions created from "one investor relationship" and about "USD 31,000 through our own short of Adani US bonds," Hindenburg said.

It, however, did not name the investor.

Sebi did not immediately offer any comments on the Hindenburg claims.

"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.

The US short-seller said it received a 46-page show cause notice from Sebi on June 27.

Hindenburg said it was short on Adani shares "through a deal with an investor partner who was indirectly short Adani derivatives through a non-Indian, offshore fund structure".

That it was short on Adani shares was fully disclosed, it said.

On January 24, 2023, Hindenburg published a report alleging stock manipulation and accounting fraud at the Adani group, calling it "the largest con in corporate history", ahead of a proposed Rs 20,000 crore share sale by Adani Enterprises -- the group's flagship firm.

Adani Group repeatedly denied the Hindenburg report, calling it malicious and baseless. The conglomerate has recovered bulk of the stock losses since.

The Supreme Court in January this year ruled that the Adani Group won't face any further investigations beyond Sebi's current scrutiny, which spanned a probe into tax haven use and stock manipulation.

Hindenburg termed the Sebi show cause notice as "nonsense" and "concocted to serve a pre-ordained purpose: an attempt to silence and intimidate those who expose corruption and fraud perpetrated by the most powerful individuals in India." "After 1.5 years of investigation, Sebi identified zero factual inaccuracies with our Adani research. Instead, the regulator took issue with things like our use of the word 'scandal' when describing multiple prior instances of Adani promoters being charged with fraud by Indian regulators, and our quoting of an individual that alleged Sebi is corrupt and works 'hand in glove' with conglomerates like Adani to help it skirt regulations," it said.

The US firm said the show cause notice does resolve some questions: "Did Hindenburg work with dozens of firms to short Adani, making hundreds of millions of dollars? No -- we had one investor partner, and net of costs we may barely come out above breakeven on our Adani short.

"Our work on Adani was never justifiable from a financial or personal safety perspective, but it is by far the work we are most proud of," it said.

"To this day, Adani has still failed to address the allegations in our report, instead providing a response that ignored every key issue we raised and has offered blanket denials of subsequent media allegations," it said, adding that its January 2023 report had "provided evidence of a vast network of offshore shell entities controlled by (group chairman) Gautam Adani's brother, Vinod Adani, and close associates".

On the Sebi notice, it said, "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. Note that we are a US-based research firm with zero Indian entities, employees, consultants or operations." The regulator, it said, claimed that the disclaimers in the report were misleading because the firm was "indirectly participating in the Indian securities market." "This wasn't a mystery, virtually everyone on earth knew we were short Adani because we prominently and repeatedly disclosed it," it said.

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