Editor’s note (January 30, 2023): Adani Group has published a 413-page rebuttal to short-seller Hindenburg Research’s claim that its shares are artificially inflated. Since Hindenburg released the analysis report, the market value of Adani Group’s seven listed companies has fallen by about 30%.
fread-only Gautam Adani has been India’s wealthiest citizen since the 1980s. Now, in just a few days, the foundations of his vast empire have been shaken. On Jan. 24, a small New York-based investment firm called Hindenburg Research published a report calling Adani Group “the largest fraud in corporate history.” In a series of statements, the group responded by saying the report was “maliciously mischievous”, “unresearched” and designed to “undermine” the secondary offering of the group’s flagship listed company, Adani Enterprises. The group also said that Hindenburg “made no attempt to contact us or verify the fact matrix” when he published the report. “We are deeply disturbed by the deliberate and reckless attempt by a foreign entity to mislead the investor community and the public,” wrote the group’s lead attorney, Jatin Jalundhwala.
The vehement denials did not prevent a sell-off in the shares of seven of Mr Adani’s listed companies, first after Hindenburg’s report and then again when markets reopened on January 27 after a public holiday. In two trading days, the total market value of Adani Group’s listed companies fell by $47 billion, or 22%. According to research firm Hurun Report, Mr Adani’s personal wealth has fallen to $93 billion from $122 billion at the end of 2022. The event also drew the world’s attention to one of India’s corporate success stories — and a key driver of the country’s recent economic growth.
Hindenburg could not have chosen a larger whale when targeting Mr Adani. After dropping out of school at 16, the entrepreneur worked his way through a series of jobs, first trading diamonds, then metals and grains, and finally infrastructure. Today, his company operates some of India’s largest ports, stores 30 percent of its grain, operates one-fifth of its electricity transmission lines, accommodates a quarter of its commercial air traffic and produces about one-fifth of its cement . An affiliated Singapore joint venture seeks to become India’s largest food company. The Adani Group has also invested in strategic ports in Australia, Israel and Sri Lanka.
In the last fiscal year, the total revenue of the group’s listed companies was US$25 billion, equivalent to 0.7% of India’s gross domestic product, with a net profit of $1.8 billion. Their total annual capital expenditure is about $5 billion, which is 4% of the total expenditure of all listed non-financial companies in India. Mr Adani’s plans are grander. The group is expected to spend more than $50 billion on investments between 2023 and 2027, including clean energy and hydrogen.
Mr Adani is widely regarded as a master operator with a gift for navigating the complex legal and political environment of Indian capitalism. Still, some investors have occasionally raised concerns about his group’s governance and opaque financials. This is the point of the Hindenburg report. It describes a complex network of funds and shell companies, some of which are based in Mauritius, interacting with 578 subsidiaries spread across seven listed companies. Last year, these entities conducted 6,025 related-party transactions, Hindenburg said.
Byzantine corporate structures are common in India and other emerging markets. But the report said the Adani group “engaged in a brazen scheme of stock manipulation and accounting fraud”. The key to the complexity, Hindenburg claimed, was manipulating the stock prices of public companies and moving funds onto balance sheets to “maintain a semblance of financial health and solvency” amid high debt and relatively few liquid assets. .
As a result, the five publicly traded companies were 85 percent overvalued and their financial holes temporarily covered up, despite their acute shortage of liquid assets, Hindenburg wrote. The group’s “apparent accounting irregularities and sketchy transactions” were facilitated by “virtually non-existent financial controls”. Hindenburg claims Adani Enterprises has 156 subsidiaries, but its reports were audited and signed off by a small accounting firm that employs a handful of people, some in their early 20s.
Adani Group said such allegations had been “tested and dismissed by the Supreme Court of India”. On January 27, the group released a PowerPoint presentation rebutting Hindenburg’s claims. Specifically, it noted that the group’s debt is being reduced, while the operating company’s debt issuance has been rated investment grade by several rating agencies. It added that multiple accounting firms had been used to provide audit services. Mr Jalundhwala said Hindenburg’s report caused “unnecessary suffering for the citizens of India” and adversely affected the company and its shareholders. “We are reviewing the relevant us and Indian law with remedial and punitive measures against Hindenburg Research,” Mr Jalundhwala wrote.
Hindenburg responded on Twitter that it stood by its report and welcomed the prospect of legal action, especially in the United States. “We have a long list of documents that we need in the legal discovery process,” the investment firm said.
The report is currently upending Adani Enterprises’ much-anticipated secondary offering. The aim is to raise about $2.5 billion in new capital, partly to reduce debt. The first phase of the offering on January 25 raised $735 million, with $735 million raised and 30% raised. Several high-profile investors are bidding, including Abu Dhabi Investment Authority, Life Insurance Company of India and entities linked to two U.S. banks, Goldman Sachs and Morgan Stanley. Shares in Adani Enterprises have since fallen below the offering price. The larger public portion of the offering, which began on Jan. 27 and was due to close on Jan. 31, has so far attracted few buyers. ■