The Collapse of Adani's House of Cards - The Hindenburg Effect

In early January 2023, not only was Gautam Adani the richest in Asia, he was the third-richest in the world and just a few billion shy of Elon Musk. 

But on January 24, 2023, just two days before the Adani Enterprises' Rs 20,000 crore FPO was about to open, Hindenburg Research (self declared short-seller) released a report accusing Adani Group of "brazen stock manipulation and accounting fraud scheme". Hindenburg cited 2 years of research, including talks with former senior executives and formal review of various documents. Hindenburg also asked 88 questions to the Adani Group. X

Some of the key accusations by Hindenburg are:

• Gautam Adani, Founder and Chairman of the Adani Group, has amassed a net worth of roughly $120 billion, adding over $100 billion in the past 3 years largely through stock price appreciation in the group’s 7 key listed companies, which have spiked an average of 819% in that period.
  
• The 7 key listed companies have 85% downside purely on a fundamental basis owing to sky-high valuations.
  
• Key listed Adani companies have also taken on substantial debt, including pledging shares of their inflated stock, putting the entire group on precarious financial footing. 5 of 7 key listed companies have reported ‘current ratios’ below 1, indicating near-term liquidity pressure.
  
• Hindenburg identified 38 Mauritius shell entities controlled by Adani’s brother, Vinod Adani, or his close associates plus entities controlled by him in other tax havens. The offshore shell network seems to be used for earnings manipulation.
• The Adani Group has previously been the focus of 4 major government fraud investigations which have alleged money laundering, theft of taxpayer funds and corruption, totaling an estimated U.S. $17 billion. Adani family members allegedly cooperated to create offshore shell entities in tax-haven jurisdictions like Mauritius, the UAE, and Caribbean Islands, generating forged import/export documentation in an apparent effort to generate fake or illegitimate turnover and to siphon money from the listed companies.
• Adani Enterprises and Adani Total Gas appear to be audited by a tiny firm, with no current website, only four partners and 11 employees, and which has audited just one other listed firm.The auditor hardly seems capable of complex audit work, when Adani Enterprises alone has 156 subsidiaries and many more joint ventures.
• Adani Group’s obvious accounting irregularities and sketchy dealings seem to be enabled by virtually non-existent financial controls. Listed Adani companies have seen sustained turnover in the Chief Financial Officer role. For example, Adani Enterprises has had 5 chief financial officers over the course of 8 years, a key red flag indicating potential accounting issues.
  
• Leaked emails of Elara (one of Vinod Adani linked shell companies) had dealings with notorious stock manipulator Dharmesh Doshi, partner of Ketan Parekh, even after Doshi became a fugitive for his alleged manipulation activity.
• A once-related party entity of Adani called Gudami International, headed by close Adani associate Chang Chung-Ling, invested heavily in one of the Monterosa funds that allocated to Adani Enterprises and Adani Power. Monterosa entities continue as key Mauritius shareholders in Adani companies.
  

Adani rebutted the accussations on January, 29, 2023 with a 413 page reply. Adani said that it has addressed some 65 of the 88 questions raised by Hindenburg in public disclosures. It described the short seller’s conduct as “nothing short of a calculated securities fraud under applicable law.” The group said it would “exercise our rights to pursue remedies to safeguard our stakeholders before all appropriate authorities.”  x

Hindenburg then said Adani’s response ignored all its key allegations and was “obfuscated by nationalism".

In past, a Hindenburg report has invariably been followed by a huge crash in the stock price of the target company - Nikola, for instance. Unsurprisingly, Adani Group shares are facing a similar fate!

Meantime, Credit Suisse and Citigroup have assigned zero value to bonds issued by the Adani Group while Dow Jones has removed Adani Enterprise from Dow Jones Sustainability Indices. 

In a short span of less than 10 days, Gautam Adani's personal fortunes have plummeted by close to US $ 50 billion while his firms hemorrhaged around $100 billion in market value. Adani Enterprise even cancelled it's FPO despite the same getting the backing of FII and UHNI/HNI.

What are your thoughts? Is Gautam Adani's dream run over? Or Is this an attack on India's Atmanirbharta?

The Adani empire started collapsing under the pressure of the main allegation, Insider Trading. 

It’s an “activist short seller”, with a financial incentive in seeing Adani’s stock price fall.

Hindenburg makes its profits by identifying “man-made disasters floating around in the market”. It bets on the stock falling, then publicises that company’s negatives. 

Short selling --also known as having a “short exposure”, or “shorting” is essentially betting on a company’s stock falling!!

The process is more complicated than betting on a share price rising, for which all you have to do is buy the stock and wait for it to appreciate. Short selling is a high risk betting. 

It can be done in several ways. The most common is to sell borrowed stock. The “short seller” makes a contract with a share owner to borrow shares for an agreed period. They then sell that stock, banking the proceeds. When the time comes to return the stock, they buy shares on the market to “repay” the money taken. If the price has fallen in the meantime, they make a profit. As simple as that. 

It is called as Market manipulation. It is illegal in most jurisdictions for activist short sellers to profit by spreading false or misleading information. This is the case in Australia and the US (where Hindenburg and some of its positions in Adani are based). But this is relatively easy to discover.

This Insider trading would be illegal to bet on a company’s future share price using information that is not generally available, then reveal that information. 

On this, Hindenburg Research is skating on thin ice with some of its assertions. For example, its report says of Adani’s deals to build a rail line to transport coal in Queensland. None of the transactions were specifically disclosed in the Adani Enterprises annual reports. We uncovered them only by reviewing financials for the private Singaporean Carmichael Rail entity.

If those financials were publicly available in a database or online, Hindenburg Research is in the clear. But if the financials were not generally available, it risks being accused of insider trading.

Ethics can be arbitrary--- However, we can consider some guidelines. These include: 

Does society benefit from information about fraud coming to light? 

If there were no financial incentive, would a company really spend two years doing detailed forensic analysis? 

Does anyone unfairly lose to justify rules or laws to discourage such profits?

Exposing fraud is in the public interest. There must be some financial incentive to do such work. Existing shareholders are losing from Adani’s stock tumble, but that should properly be credited to the alleged fraud, not the report.

Now, the main question is .... within a short span of time, how Adani's rose from normal level to an abnormal level? Who is there behind their rise and the inevitable fall??? 

Thank you Tanu for creating this excellent post with an interesting topic.  

A little background into the Hindenburg institution and their ulterior motive.

https://twitter.com/vijaygajera/status/1621048615329468417?t=N2EGH3LuhsUA8c1Iiq6tsA&s=19

Interesting topic, Tanu 👍🏼

Most of the rich people in the world do fraud and whatnot to evade taxes so that they can continue to have a rich lifestyle.

It’s only the middle class in this world who faithfully pay taxes everywhere and still go through scrutiny by tax officials. 

Thanks Tanu, for such an interesting topic 

I would like to see this scenario from a different perspective. 

Almost every business person uses, manipulates, interprets, laws of the country for their own benifits. Diverting funds in tax heaven is one of them. 

Most of seasoned business people are mentally prepared for such downfall. They must have experienced it in some or other way in earlier stages of their life. If they are lucky to have a good support system, then in long run they may come out with right practice. People will start trusting them again. 

Here retaining reputation is most important. Genuine efforts of tackling crisis, will work the most. As everyone is watching his each & every move. A small mistake will cost him a lot. Here he is not alone. Many investor's stakes are involved too.

Such situations can become life time lessons for many. Short cuts may not work always. 

I really wish for the sake of investors, things should improve soon. 

The recent fall in Adani stocks has caught the attention of investors and market analysts alike. The accusations of fraud by Hindenburg Research have added to the woes of the conglomerate, causing a substantial decline in stock value. However, it's crucial to note that the future of Adani Group is yet to be determined. The company and its leadership will have to work towards restoring investor confidence and addressing the allegations made against them.

It remains to be seen how the group will navigate this challenging period and what steps they will take to regain trust in the market. In the meantime, investors and stakeholders will be closely monitoring the situation and waiting for developments that could impact the future of the company. Ultimately, the future of Adani Group will depend on how they respond to these challenges and whether they can turn the situation around.

Reports from short-selling companies like Hindenburg Research can certainly have an impact on the credibility of a company or a country. However, it's important to consider that short-selling companies often have a financial incentive to find and highlight negative information about a company. In the case of Adani Group, the accusations made by Hindenburg Research are yet to be proven or substantiated by an official investigation.

It's crucial for companies and countries to respond to such reports in a transparent and responsible manner, addressing any genuine concerns and providing a clear explanation of their financial situation. This can help mitigate the impact of negative reports on credibility and restore confidence in the market.

In conclusion, while reports from short-selling companies can have an impact on credibility, it's important to approach them with a critical eye and consider the motivations and credibility of the source.

Thank you to all for taking the time to comment. I am quite intrigued at the absolute silence of SEBI in dealing with this issue. 

Originally posted by: Armu4eva

Thank you to all for taking the time to comment. I am quite intrigued at the absolute silence of SEBI in dealing with this issue. 

They are yet to figure out which side they should go. 😊

And with investor confidence so fragile they are also little scared. Even the mention that they are looking into the accusations some one will say what they were doing earlier that a foreign company investigation found which they couldn’t.

Damned if you do and damned if you don’t. It’s a precarious situation for them.

Stock market is highly sentimental & volatile.

If investors show some maturity instead of running away by selling or manipulating market, situation could have been better. 

Most of the investment is done with proper research. But with only one small whisper in few ears, market crashes. Counter research hardly happens. This shows its very easy to downgrade even ruin genuine efforts. In such circumstance, for the sake of investors, I really wish, Amani should come up again.

Originally posted by: Swetha-Sai

Interesting topic, Tanu 👍🏼

Most of the rich people in the world do fraud and whatnot to evade taxes so that they can continue to have a rich lifestyle.

It’s only the middle class in this world who faithfully pay taxes everywhere and still go through scrutiny by tax officials. 

Middle class is daily looted abused used humiliated by both lower and upper class