India regulator presses ahead against Hindenburg, others in Adani case, sources say

India's market regulator has started hearing representations as it seeks to recover gains from trades it suspects benefited from prior knowledge of Hindenburg Research's scathing report about Adani Group, two people with knowledge of the matter said.

The Securities and Exchange Board of India (SEBI) in 2024 said U.S.-based Kingdon Capital Management built short positions in Adani-related stocks through a Mauritius-based fund linked to Kotak International before Hindenburg published its report.

Short positions refer to selling borrowed shares, buying them back when the share price drops, then pocketing the difference.

Short seller Hindenburg in its 2023 report said Adani Group had violated securities law, triggering a selloff of related shares and a consequent drop in their prices, and wiping out $150 billion in group value. Adani Group denied wrongdoing.

SEBI dismissed Hindenburg's allegations of stock manipulation against the group.

In 2024, SEBI detailed a profit-sharing agreement between Hindenburg and Kingdon and said six entities gained $22.25 million from short-selling trades.

SEBI, Hindenburg, Kingdon and Kotak did not respond to emails seeking comment. Hindenburg previously denied wrongdoing and described SEBI's assertions as "nonsense".

The case is widely regarded as setting a precedent in the pursuit of offshore entities and the recovery of assets overseas. It has already involved the rare attempt of seeking a stay in a foreign insolvency proceeding to enforce penal action.

The regulator has started personal hearings more than two years later as the parties involved took time to respond, the people said. All parties are based overseas but SEBI believes it has jurisdiction since the trades were in India, they said.

SEBI is proceeding with enforcement, arguing that the trades were based on non-public information and so violated rules aimed at preventing fraud, said one of the people.

To secure assets for recovery, SEBI has opposed court-supervised insolvency proceedings in Mauritius for the Kotak fund – K India Opportunities Fund Class F – used to execute the trades, the people said. Proceeds of the trades went into the fund, they said.

Reuters could not determine whether gains were distributed or redeemed by Kingdon as fund beneficiary.

After learning of the insolvency, SEBI asked the court-appointed receiver in the first week of July to ensure fund assets were not transferred or distributed before it had ordered the recovery of alleged gains and interest, the people said.

Mauritius' Supreme Court appointed the managing director of business advisory and restructuring firm Quantuma as receiver in June to control and protect the fund's assets, the people said.

Quantuma declined to comment.