A mysterious tweet by the Hindenburg Research group on January 25 set the ball rolling down the slope of one of the most prominent exposés in the history of Indian mega corporates
Christalle Fernandes
On January 25, at 2:34 a.m., the Hindenburg Research group, a New York-based investment management firm founded by activist short seller Nathan Anderson 2018, posted a cryptic tweet on their official Twitter page. “Soon we will release a report on what we strongly suspect to be the largest corporate fraud in history.”
A few hours later, the company released a series of tweets accusing the Adani group of “brazen stock manipulation” and “accounting fraud”. The tweets went onto amass more than a million views in hours, drawing mixed reactions from Indian industry experts, politicians, and citizens. Let’s look at the story behind the Adani-Hindenburg clashes and what’s next for the Adani group.
But first—what is short-selling?
Short-selling is a strategy through which an investor borrows securities and ‘sells’ them, buying them back when the price falls in the future. The investor then ‘returns’ these shares or securities back to the broker or dealer when the duration of borrowing ends, profiting off the price difference. This form of trading is different from regular trading, because you technically cannot ‘sell’ something you did not buy. Holding a short position means that you are borrowing money from the broker, using the investments you have as collateral.
Short-selling is legal in the Indian trading market, subject to several rules and regulations.
What is Hindenburg Research and why are they targeting Adani?
Nate Anderson founded Hindenburg Research in 2018. The founder is a bit of an elusive persona, having worked as an ambulance driver in Israel and in several investment firms, before founding Hindenburg Research.
Hindenburg stated that they had conducted a two-year investigation into the source of funds of the Adani group. An investment management firm that conducts forensic financial research, according to their website, it specializes in uncovering financial irregularities in the accounting statements of companies. It is also a short-selling firm itself.
The group analyzed the Adani’s wealth valuation over decades, since the time he started out as a businessman up till 2022, when he rose through the ranks as one of the richest people in the world, according to Forbes.
The Hindenburg report is titled “Adani Group: How The World’s 3rd Richest Man Is Pulling The Largest Con In Corporate History.”
Why did Hindenburg Research accuse Adani of Stock Manipulation and Accounting Fraud?
As of January 25, 2023, the Adani group of companies was valued at INR 17.8 trillion rupees, or USD $218 billion. Hindenburg looked at Gautam Adani’s net worth over the years, from the time the business conglomerate owner started out in the year 1985 up to 2022, when the company had become one of the richest in the world. What they claim to have found out was that much of the billionaire’s wealth accrued to him during the past three years: $100 billion out of the total $120 billion. The reason for this was largely due to an appreciation, or increase in value, of the Adani shares in the Indian stock market.
Gautam Adani, founder of Adani Enterprises, started out with polymer imports for industries and went on to establish Adani Exports, dealing in power generation, coal mining, gas distribution, among other enterprises. The group has seven listed companies on the National Stock Exchange (NSE): Adani Enterprises, Adani Transmission, Adani Total Gas, Adani Green Energy, Adani Power, Adani Ports, and Adani Wilmar. An analysis of the stock gains during a three-year period revealed that the value of the stocks jumped as much as 1000%, in some cases. Hindenburg stated that the average spike of the stocks over the three-year period was 819%.
What else did the Hindenburg Investigation Reveal?
Hindenburg alleged that the Adani group was guilty of short-selling by inflating the value of its stock prices and manipulating the stock market. As per Hindenburg, Adani stocks have been ‘pumped’ up throughout the years.
The Adani group has previously been in the news for tax fraud, in the USD $4.4 billion coal-pricing scandal and over-valuation of power equipment imports. Rajesh Adani, Adani’s younger brother, was accused of using offshore shell companies to “generate artificial turnovers” in the diamond trading scheme of 2004-05.
Furthermore, companies listed on the Indian stock exchange must have more than 25% of public shares held by non-promoters (individuals who help companies raise capital in the initial stages of an IPO). However, as per Hindenburg’s claims, 4 out of the 7 Adani companies have exceeded the level of promoter ownership.
A Web of Shell Companies
Hindenburg Research said that they had identified 38 Mauritius shell entities controlled by Vinod Adani and close associates. They stated that Gautam Adani’s elder brother Vinod Adani was responsible for handing these illegal shell companies. Money from the Adani group was being re-routed through tax havens in Mauritius, UAE, and the Caribbean, with the co-operation of the Adani family members. Hindenburg alleged that these companies were being used to buy shares in Adani companies, thus inflating the stock price.
Mauritius has long been known as a ‘tax haven’ because of its rules that allow foreign companies to set up operations with little to no tax disclosures.
What was the Adani Group’s Reaction to the Hindenburg Allegations?
Adani shares began to fall rapidly since the Hindenburg announcement, losing over $100 billion in days. According to Bloomberg, the company was valued at $236 billion before the Hindenburg report, on January 24, which fell to $127 billion by February 8. In a statement on its official Twitter, the Adani group of companies released a statement saying that “the maliciously mischievous, unresearched report” created “volatility in the Indian stock markets”. The Adani group alleged that the report was bases on “unsubstantiated” claims to “sabotage the Follow-On Public Offering (FPO)”. In the days following, the company released its own 413-page report countering the Hindenburg research.
However, Finance Minister Nirmala Sitharaman said that the Indian economy was not impacted due to the Adani controversy, in a statement to Press Trust of India (PTI).
According to Mint, the Adani Group’s 10 listed firms have suffered a combined loss of about $140 billion dollarsas of February 22, 2023.
What’s Next for Adani-Hindenburg?
Gautam Adani, once the second-richest man in Asia, saw his status fall to the 25th rank on the Forbes list. The Adani group Rs. 20,000-crore FPO was cancelled and investors will be refunded. The group has hired US-based Wachtell, an activism defence firm, to defend itself against the claims of accounting fraud and stock manipulation.
As for Hindenburg, the company replied to Adani’s statement saying:
“Fraud cannot be obfuscated by nationalism or a bloated response that ignores every key allegation we raised.”
Norway-based pension fund KLP, which is also an Environmental, Social, and Governance investor (ESG), withdrew its shares in Adani Green Energy Ltd., stating that it feared the company was funding coal mining. On February 28, JP Morgan Chase & Co. has withdrawn its stakes in cement manufacturer ACC Ltd., where it held about 70,000 shares.
As of today, March 14, the Adani group of companies is valued at $24 billion.
With agency inputs.
(To read the whole report on Adani, visit the official Twitter handle of Hindenburg Research or the website here. The counter-claims by the Adani Group can be found here: https://t.co/byWV8z9q6O )
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