Fresh development in the dispute between American short seller Hindenburg and India's Adani Group.

Hindenburg Research has refuted accusations from India’s securities regulator that it collaborated with a U.S. asset manager to utilize nonpublic information for establishing a short position against Adani Group last year, which could potentially violate the country’s regulations.

On Monday, Hindenburg posted a 46-page "show cause" notice from the Securities and Exchange Board of India (SEBI) on its website, detailing the allegations in the ongoing saga that originated when the U.S.-based short seller raised concerns about Adani’s business practices last year.

The notice alleged that six entities, including Hindenburg, Kingdon Capital Management, and a Mauritius-based trading fund linked to Kotak Mahindra Bank, violated regulations under the Prevention of Fraudulent and Unfair Trade Practices rules. Hindenburg dismissed the allegations as "nonsense."

Kingdon did not respond to a request for comment from the news agency on Tuesday. Hindenburg's statement did not address its relationship with Kingdon and did not respond to an email seeking comment.

"Hindenburg stated in its response to the notice, which two SEBI sources confirmed as authentic, that SEBI has neglected its duty, seeming to protect wrongdoers rather than the investors they harm," Hindenburg said in its statement.

SEBI mentioned in the notice that it had received information from or through the U.S. Securities and Exchange Commission (SEC) during its investigation.

Adani, consistently denying Hindenburg's allegations, saw its market value plummet by up to $150 billion following the report but has since recovered to pre-report levels.

SEBI did not respond to requests for comment on Tuesday regarding Hindenburg's statement or the show cause notice. If proven, the alleged breaches could lead to financial penalties and the return of any illicit gains.

Hindenburg disclosed that it earned $4.1 million in gross revenue through "gains related to Adani shorts from that investor relationship" and just $31,000 from its short position on Adani's U.S. bonds, without identifying the investor.

"It was a minor position," Hindenburg noted, shedding light on its Adani short, which piqued interest due to India's stringent securities regulations against foreign bets on local companies.

SEBI Allegations:

SEBI alleged that Hindenburg collaborated with its client Kingdon Capital Management by providing a draft of its Adani Group report before its public release.

According to SEBI, Mark Kingdon, the founder of Kingdon Capital, established a fund capable of trading Indian equities called K India Opportunities Fund. This fund reportedly initiated short positions in Adani Group stocks from January 10, 2023, to January 20, 2023, five days before Hindenburg's report went public.

Founded in 1983, Kingdon had assets under management totaling $639.2 million in January, according to an SEC filing.

Kingdon manages two strategies: a global long-short equities strategy that also ventures into credit, government securities, commodities, and currencies, and a healthcare-focused long-short strategy, as per the filing.

Hindenburg claimed that a Mauritius-based unit of India's Kotak Mahindra Bank facilitated an offshore fund structure used by its "investor partner" to bet against Adani's shares.

Late on Tuesday, Kotak Mahindra Bank stated in a stock exchange announcement that neither the K India Opportunities Fund nor Kotak Mahindra International were aware of any association with Hindenburg entities.

The bank confirmed it had received a notice of allegations from the regulator, clarifying that no regulatory action had been taken against the fund.

Kotak Mahindra Bank shares dropped by as much as 3.93 percent on Tuesday.