Edit in JSFiddle

    (function () {
        var countries = new kendo.data.DataSource({
            data: [{
                Name: "United States of America",
                CategoryId: 0,
                Category: "North America",
                OriginalOrdinal: 0,
                Ordinal: 0
            }, {
                Name: "Canada",
                CategoryId: 0,
                Category: "North America",
                OriginalOrdinal: 1,
                Ordinal: 1
            }, {
                Name: "Mexico",
                CategoryId: 0,
                Category: "North America",
                OriginalOrdinal: 2,
                Ordinal: 2
            }, {
                Name: "Argentina",
                CategoryId: 1,
                Category: "South America",
                OriginalOrdinal: 0,
                Ordinal: 0
            }, {
                Name: "Colombia",
                CategoryId: 1,
                Category: "South America",
                OriginalOrdinal: 1,
                Ordinal: 1
            }, {
                Name: "Chile",
                CategoryId: 1,
                Category: "South America",
                OriginalOrdinal: 2,
                Ordinal: 2
            }],
            group: {
                field: "Category"
            },
            sort: {
                field: "Ordinal",
                dir: "asc"
            }
        });

        var grid = jQuery('#grid').kendoGrid({
            dataSource: countries,
            autoBind: true,
            scrollable: true,
            sortable: false,
            selectable: false,
            filterable: false,
            columns: [{
                field: "Name",
                title: "Countries"
            }, {
                field: "Ordinal",
                title: "Ordinal",
                width: 125
            }, {
                field: "OriginalOrdinal",
                title: "Original Ordinal",
                width: 125
            }, {
                field: "Category",
                groupHeaderTemplate: "#= value #",
                hidden: true
            }]
        }).data('kendoGrid');

        grid.table.kendoSortable({
            filter: "> tbody > tr:not(.k-grouping-row)",
            hint: $.noop,
            cursor: "move",
            placeholder: function (element) {
                return element.clone().addClass("k-state-hover").css("opacity", 0.65);
            },
            container: "#grid tbody",
            end: function (e) {
                var newIndex = e.newIndex;
                var draggedItem = grid.dataSource.getByUid(e.item.data("uid"));
                var targetRow = jQuery(this.items()[newIndex]);
                var targetItem = grid.dataSource.getByUid(targetRow.data('uid'));

                if (draggedItem.CategoryId !== targetItem.CategoryId) {
                    alert("Country can only be sorted within its own Category");
                    e.preventDefault();
                }
            },
            change: function (e) {
                var sortable = this;
                var draggedItem = grid.dataSource.getByUid(e.item.data("uid"));
                var categoryId = draggedItem.CategoryId;
                var dataSource = grid.dataSource;
                var itemsInCategory = jQuery.grep(sortable.items().slice(0), function (item) {
                    var dataItem = dataSource.getByUid(jQuery(item).data("uid"));
                    return dataItem.CategoryId === categoryId;
                });

                for (var i = 0; i <= itemsInCategory.length - 1; i++) {
                    var item = itemsInCategory[i];
                    var dataItem = dataSource.getByUid(jQuery(item).data("uid"));
                    dataItem.set("Ordinal", i);
                }

                //dataSource.sync();
            }
        });
    })();

<div id="grid"></div>

html {
    font: 400 12px Arial, Helvetica, sans-serif
}