The sprawling empire of Gautam Adani, the Indian industrialist and one of the world’s richest men, seemed unstoppable until American investor Hindenburg Research accused his company of “perpetrating the biggest fraud in corporate history.”
As markets opened in Asia after the report, spooked investors unloaded their positions in seven Adani-listed companies. Over the course of a few days, Adani’s group of companies shed more than $90 billion (£73 billion), representing more than a third of its stock market value.
Its billionaire chairman has also dropped out of the world’s top 10, and the company’s much-lauded stock sale has been canceled.
The report makes serious allegations of stock manipulation and accounting fraud that threaten to put further pressure on the Ahmedabad-headquartered company, curbing its global ambitions.
The Adani group – which includes ports, power, coal and renewables – has strongly denied the report’s claims, describing it as a “damaging mix of selective misinformation and outdated, baseless and discredited allegations” and Hindenburg. accused of trying to damage his reputation. The big-stock offering equated the Jan. 24 report to an attack on India, while noting that Hindenburg, a U.S.-based short-selling activist, was profiting from the chaos.
Who is Adani and what companies has he founded?
Adani comes from a textile family in the western Indian state of Gujarat, the same industrial region where Prime Minister Narendra Modi hails from.
With a background in commodity trading and diamond sorting, Asia’s richest man has built his business into a $220 billion conglomerate that includes seven listed Indian companies as well as numerous private companies.
Over the past three years, Adani’s net worth has increased by around $100 billion due to a sharp increase in the share price of listed companies.
The Indian conglomerate remains heavily dependent on coal, which includes its Carmichael mine and rail project in Queensland, Australia, which has faced strong opposition over the expansion of thermal coal use and environmental impacts on the Great Barrier Reef.
Part of Adani’s appeal in India is that its assets, which include fossil fuels as well as solar and wind power, are seen as an answer to the growing energy needs of an expanding economy.
What is the Hindenburg investigation and what did it do to Adani?
Founded by investor Nate Anderson in 2017 and named after the 1937 airship disaster, Hindenburg is an American financial firm that invests in listed companies with a focus on finding tradable entities that it believes are highly indebted and weak or They cheat, he analyzes.
Hindenburg then looks to profit from the fall in its share price.
On January 24, it published a report targeting Adani companies, which it said was the result of a lengthy investigation. Adani’s seven listed companies sold off sharply on Indian bourses.
What do short sellers do?
Conventional shorting involves an investor betting that a particular asset will decline in value, traditionally done in markets that allow investors to “borrow” a security, sell it, and then hopefully buy it back at a lower price.
There are other more sophisticated financial instruments that can be used to benefit from falling prices, usually involving two parties to the contract.
Active sellers like Hindenburg typically take a short position in a publicly traded company that they believe is grossly overvalued before it reports to the public, hoping that investors will then lower their target price.
In the disclaimer, Hindenburg noted that it would realize “significant profits” if Adani’s companies were to drop prices. It also said it will continue to trade after the report is released and may be “long, short or neutral.” This means that its current location is uncertain.
The Adani Group has attacked Hindenburg’s motives for profiting at the conglomerate’s expense.
In a lengthy rebuttal published on January 29, the group said: “The claims and innuendos, presented as fact, spread like wildfire, wiping out a large amount of investor wealth and making a profit for the Hindenburg. .
Hindenburg does not deny profiteering, but denies any wrongdoing. Its defense is that the report is accurate and the result of a two-year investigation that included site visits in several countries.
What are the Hindenburg’s main charges?
The most dramatic allegations refer to what Hindenburg claims was a “brazen accounting fraud and stock manipulation scheme” that inflated the prices of Adani’s listed companies and inflated the net worth of its billionaire chairman.
Hindenburg claims this is done by using shell companies to manipulate the prices of listed companies with large positions. Hindenburg said the shells are used to “launder” money on the balance sheets of listed companies, which helps maintain the appearance of financial health and solvency.
Then those funds can be transferred to the institutions where capital is needed.
Separately, Hindenburg pointed to transactions related to its Australian operations, which it claims may allow Adani to avoid exposing the sharp decline in the value of its assets by moving them to a private company.
The US firm also claims that Adani’s listed companies have significant debt, putting the entire group on a “precarious financial footing”.
Hindenburg cited the high turnover of finance executives at the group’s flagship Adani Enterprises, as well as the use of “relatively unknown” auditors, as red flags.
How has Adani responded?
Adani has issued a 413-page rebuttal denying all claims that Hindenburg made to record huge financial profits.
Specifically for investors, the institute said that the amount of money borrowed by its companies is in line with industry standards and that any related party transactions are properly accounted for.
Adani notes that several of the financial officers Hindenburg refers to continue to work for the organization in various roles, and said the audit committees of listed companies are made up entirely of independent directors.
The report is described as a “calculated attack on India, independence, integrity and quality of Indian institutions, and the story of India’s growth and ambition”.
What happens next?
The report comes on the eve of a major fundraising campaign designed to pay off debt and financial expenses at Adani.
The group was able to complete the $2.5 billion equity offering with the help of major investors such as Abu Dhabi International Holdings, which raised about $400 million. But it canceled the offer after the stock price fell again, meaning participating investors would face immediate and large losses.
During the fundraising effort, social media posts in India praised Adani, and “#IndiaStandsWithAdani” was a trending hashtag on Twitter. Some Indian politicians declared their support for Adani against “foreign interests”.
The battle between short sellers and their targets can play out over long periods. If the allegations continue to affect Adani and regulators believe an investigation is warranted, the company’s ability to raise capital will be limited and its operations disrupted.
Adani’s Australian business said neither the securities regulator nor the tax office had contacted the group about the report.
There is also the question of whether Adani’s global banking financiers will reassess their exposure to the group.
Adani, meanwhile, is trying to reassure investors that its companies are safe to invest in and offers growth prospects that will help stabilize the share prices of its listed companies.
There has been no sign of easing pressure to date, with the abandoned share offer sparking a sell-off in Adani’s holdings.