Kotak Arm, Five Other Entities Could Face Money Laundering Probe Post SEBI Show Cause

OʻThe show cause notice to Kotak Bank arm, K-India Opportunities Fund - Class F and five other entities could potentially open investigation under the Prevention of Money Laundering Act, 2002.

Allegations under Prevention of Fraudulent and Unfair Trade Practices regulations and insider trading are scheduled offences under PMLA and hence show cause notice of Sebi alleging such violations can become basis of action under PMLA by the Enforcement Directorate, if other parameters are satisfied, said RS Loona, Managing Partner, Alliance Law to NDTV Profit adding that however the validity of any such action under Prevention of Money Laundering Act will depend upon the nature of supporting evidence.

PMLA can be invoked only if there is a predicated offence. It is still not adjudicated and is still a surmise and still at an investigation stage, said Sanjay Asher, Senior partner with Crawford Bayley & Co. to NDTV Profit adding that if SEBI passes an order based on adjudication PMLA can be invoked.

An adjudication by the market regulator could set off a process to seek regulatory cooperation from international agencies and overseas regulators.

It is difficult to carry out investigations against entities in overseas jurisdiction, said Loona.

SEBI issued show cause notices to Nathan Anderson, his research firm Hindenburg Research LLC., Mark Kingdon and his entities led by Kingdon Capital and K- India Opportunities Fund – Class F, a fund registered with Securities and Exchange Board of India, set up and managed by Kotak Mahindra International Ltd., an arm of Kotak Bank.

The SEBI show cause notice has alleged violation under various sub-sections of Section 12A of SEBI Act and Prevention of Fraudulent and Unfair Trade Practices Regulations.

The violations under the SEBI Act and Prevention of Fraudulent and Unfair Trade Practices regulations are categorised as Scheduled offences under the Prevention of Money Laundering Act, 2002.

The scheduled offences under SEBI Act and Prevention of Fraudulent and Unfair Trade Practices regulations are classified as the offences committed against the state. These are also known as 'Predicate Offences', as the scheduled offence is a prerequisite to initiating the proceeding of money laundering under the Prevention of Money Laundering Act.

The designated agency for investigation into money laundering is the Enforcement Directorate which can initiate proceedings under section 48 and section 49 of the Act if allegations are proved.

Under the money laundering act other agencies like State Police, Customs, SEBI, CBI, and NCB can also investigate under their respective legislations.

The enforcement directorate will find it difficult to conduct investigations against the foreign entities as it will face jurisdictional hurdles, but can investigate against entities registered with SEBI, said Loona.

SEBI can also undertake investigation under Section 24 which provides for imprisonment if found guilty. Powers under this section require stringent proof of evidence. SEBI will have to satisfy a special court with the burden of proof, Loona said.

The entities also have the option to settle the case without the admission of guilt. But this would be done through a separate process where the parties under adjudication file for terms of settlement agreeable to the regulator, who in turn will present it to the High Powered Advisory Committee, said Loona. The acceptance of the terms is at the discretion of SEBI for violations under the Prevention of Fraudulent and Unfair Trade Practices regulations. The disgorgement could be as high as three times the illegal gains, added Loona. The fund managed by Kotak booked gains of Rs 183.2 crore from shorts created on Adani Enterprises.

SEBI has alleged that the six entities were involved in a scheme of sharing draft report, waiting for Kingdon to set up trading account, agreeing to reduced profit sharing and publishing report in a pre-planned manner at the time of FPO of Adani Enterprises, claiming non-association with the Indian securities market, squaring off for short sale profit and creating specific India fund for Adani trade.