Hindenburg Report: Threat to Adani or Threat to the Indian Economy

By Manan and Garvit 

A report by Hindenburg Research LLC titled “Adani Group: How The World’s Third Richest Man Is Pulling The Largest Con In Corporate History” was published on January 24, 2023, causing panic in the Indian financial markets and the Indian economy. Hindenburg Research LLC accused Indian conglomerate Adani Group of stock manipulation and accounting fraud schemes such as money laundering, theft of taxpayer funds and corruption, over the course of decades. Due to this report, Adani stocks have been under a huge sell-off pressure for the past few days resulting in a fall in the share price of Adani Enterprises from around ₹ 3,390 per piece to ₹ 2,721, correcting to about 20% loss in the market price of shares. 

In response, the conglomerate has called the firm’s report “a malicious combination of selective misinformation and stale, baseless and discredited allegations.”

What is Hindenburg Research LLC Group and what do they do? 

Hindenburg Research LLC is an investment research firm with a focus on activist short selling founded by Nathan Anderson, based in New York City (https://en.wikipedia.org/wiki/Hindenburg_Research).   

Basically, what they do is select candidates for whom they perceive vulnerabilities, conduct in-depth investigations, engage in whistleblowing, and publish a detailed analysis of their findings, which causes investors to panic and causes the stock prices to fall, allowing them to profit significantly from short selling the stocks. Since 2020, Hindenburg has targeted approximately 30 firms (including Tesla and Twitter), and on average, their stocks fell 15% the next day, according to calculations by Bloomberg News. Six months later, the shares were on average down 26%.

There can be two ways of interpreting the Hindenburg report:

• Either it is just a whistleblowing company making false accusations to generate profit by short-selling Adani stock and disrupting the growing Indian markets.
• Where there’s smoke there’s fire –  Some of the various accusations can be true or at least partially true. Maybe Hindenburg goes after those companies only when they find some credible information to do an in-depth search and make a public statement.

The Hindenburg Report – Accusations made 

According to Hindenburg Research, “Over the course of decades, Adani Group has engaged in a brazen stock manipulation and accounting fraud operation.”

According to the short-seller, their investigation “included meeting with dozens of people, including former senior officials of the Adani Group, reading thousands of documents, and doing diligence site visits in almost half a dozen countries.”

1. Meteoric Rise of Adani’s Wealth – 85 % due to stock appreciation 

During the past 3 years, when almost every other company around the globe was falling, Adani Group was on a seemingly unstoppable ascent. Covid-19, Inflation, the growing uncertainty everything seemed unable to stop the rise of Adani’s empire. 

Most of Adani’s wealth extrapolated after 2020, a period of great turmoil and uncertainty all around the globe. According to the report, Gautam Adani with a net worth of over US $ 120 billion, added $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.

2. Why did the stock prices go up?

The main reason for the high stock valuation of Adani Enterprises and its daughter companies is the – Debt Fuelled Growth. The research claims that over the last three to four years, the combined debt of the top five Adani Group companies—Adani Enterprises, Adani Ports, Adani Power, Adani Green, and Adani Transmission—has climbed from Rs 1 trillion to Rs 2 trillion, while bank funding has not significantly increased. The “current ratio” of a corporation is a calculation of liquid assets minus short-term liabilities. With the exception of Adani Ports and Adani Wilmar, all five of the group’s companies have current ratios under 1.0, raising the possibility of increased short-term liquidity risk. The ideal current ratio should be 1 as it indicates that the company has enough liquid assets to pay off its current liabilities.

3. The Float of the company is very less

Another major reason for the company’s overvalued shares is the very limited number of shares available to the public for free trading in the market. The total number of shares that can be purchased and sold by the general public is known as the “float” of a stock.

source: Screener.com

As compared to the competitors and similar industries the float of Adani Enterprises and of its daughter companies is very less. Due to highly stated promoter (insider) shareholding, 4 Adani listed firms are currently on the verge of delisting in India. Adani Enterprises, Adani Transmission, Adani Power, and Adani Total Gas all report 72%+ of their shares held by insiders. This signifies that the total shares available in the market for trading are very less, which means that the supply is very less as compared to the demand for the shares. Due to this large difference in the quantity demanded and quantity supplied, the prices of the shares skyrocketed. 

4. Offshore Funds and Shell Companies of Adani holding a stake in the Adani Group 

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 syphon money from the listed companies. The report says “We have identified 38 Mauritius shell entities controlled by Vinod Adani or close associates.” These companies hold a significant stake in the Adani group of companies and this signifies that the original figure available for float in the market is less than 25 % which is in default of the limit set by SEBI. 

5. The small auditor for a behemoth corporation 

Shah Dhandharia is a modest company that serves as the independent auditor for Adani Enterprises and Adani Total Gas. There appears to be no active website for Shah Dhandharia. Its website’s historical archives indicate that there were just 4 partners and 11 staff at the time. According to records, it pays a monthly office rent of INR 32,000, or $435 in the year 2021. The only other publicly traded company that it audits has a market value of roughly INR 640 million (roughly $7.8 million USD).

G. Pledging of Shares  by Promoters

Pledging of shares means using the overvalued shares of the company as a mortgage for loans against those shares. Pledging of shares is not a healthy sign for the company and investors avoid investing in companies with high share pledges to avoid any risk. In a nutshell, pledging shares is a sign of low credibility, poor cash flow, inability to meet necessary requirements, and high debt.

“Myths of Short Seller” – Adani’s take

• On 27th January 2022, in response to the Hindenburg report which the conglomerate called a “malicious combination of selective misinformation and stale, baseless and discredited allegations ”, Adani group filed a presentation titled “ Myths of Short Seller”.
• According to the Adani Group, The promoters of the company are less leveraged and a smaller proportion of companies’ shares have been pledged than they were previously. This signifies that there is less chance of forced dumping of the shares that are held as mortgages if the promoters failed to pay off their huge debts. But still, there is a large portion of pledged shares which is in fact enough to create mayhem if they are dumped in the markets. 
• The conglomerate also stated that a large portion of its daughter companies is rated and hence they are credit-worthy. The credit ratings firms are paid for rating the companies so there could be no problems or malpractices in the ratings, eh? These ratings certainly cannot be seen as a benchmark that the Adani group companies are financially strong and creditworthy. 
• Adani also claimed that one of the Big 6 auditing firms audits 8 out of its 9 listed companies such as Deloitte Haskins & Sells, SRBC & Co. (EY), SRBC & Co. (EY) & Dharmesh Parikh & Co. (Joint Auditors), Shah Dhandharia & Co., Ernst & Young, PKF, Walker Chandiok & Co. and K S Rao & Co., etc. But obviously many are also aware of the misadventures of these big auditing firms over the years so there’s that for reassuring the investors. 
• The Adani group have also questioned the timing of the report as it was published just before the FPO of the flagship Adani Enterprises but after all, Hindenburg is a short-selling firm and this was obviously the best move for them. 
• Adani Group also reassured the public that in regards to malpractices in the financial system, 6 out of its 9 listed big firms are subject to specific sector regulatory review for revenue, costs, and capex.

The Collapse of the Supposedly Second Largest FPO in India 

After the report’s publication against the Adani group, the FPO (further public offer) of the Adani group took a nosedive as it saw a bid of less than 1% of the total ₹20,000 crore issue. If fully subscribed, then this will become the second largest further public offer in India only behind the ₹22,558 crore issue of Coal India in 2015. Before the publication of the report, it looked like the group would have easily achieved this feat. But circumstances changed drastically after Hindenburg’s report under which it accused the Adani group of stock manipulation and fraud schemes. The first day of the FPO saw muted demand across investors. Under the ₹20,000 crore worth FPO, on Friday, only 4,70,160 equity shares were bid against the offered size of 4,55,06,791 equity shares.

Will the Bubble burst? Is it the beginning of the end of Adani or the collapse of the Indian Financial System?

The Hindenburg report caused shock waves all around the world and especially among Indian investors and the public. It is the report that made Gautam Adani, Asia’s richest man tumble down the World’s Billionaire list from number 3 to number 7 in just two days. In just a matter of 72 hours, Adani lost $50 billion of his wealth. After the report was released, the Adani Group shares suffered a bloodbath and fell by about 19% in just two days.

So, what could be the report’s effects on the Indian stock markets in the upcoming future? Will the whole Indian stock market crash or is it just a small setback for the Adani Group alone?

As mentioned above Hindenburg Research LLC is a firm that specialises in these kinds of reports and generates profit by creating panic, making the share prices fall and then short-selling the shares. But it is also true that the Hindenburg report, if not fully true, is certainly partially true because some of the accusations can be inferred by looking at the financial statements of the company that are publicly available. 

• When compared to its rivals, Adani Enterprises and its daughter firms’ P/E and P/B ratios are alarmingly high. This demonstrates how inflated the Adani Group stock is without a doubt.

Many people who initially were unaware of such fundamental concerns in the Adani enterprises became aware of them as a result of the Hindenburg report. These facts all lead to one thing: the Adani Group’s share price will undoubtedly decline in the future, and the bubble created by Adani’s ascent over the previous three years has burst.

How significant a drop in share prices might be and how it would impact the entire Indian stock market is the next crucial question. 

So far, it appears that it will mostly affect the Adani Group and not have a substantial impact on the entire Indian stock market. The Adani Group first published a 413 paged rebuttal on January 29, 2023, which liberated the markets a little bit. The markets appeared to have improved a little bit on January 30, 2023, as the Nifty increased by 44.60 points and the Sensex increased by 169.51 points.

• Since the promoters hold the vast majority of the Adani Group’s shares, as was previously mentioned, there is essentially no likelihood that they will dump them on the market. 
• With over 7% of its whole portfolio invested in the Adani Group, LIC is also a significant stakeholder in that organisation. According to LIC’s statement, it continues to have complete faith in the Adani Group. By participating as an anchor investor in Adani Enterprises’ most recent FPO, LIC made this point apparent. So it is also safe to say that LIC too will not dump its shares in the market. 
• Additionally, if all Indian markets experience a substantial decline, the government will undoubtedly step in since it might push the country’s economy into a depression and because elections are just around the corner. 

It might not be the case if we analyse this from a whole another perspective (but these scenarios are highly unlikely to happen) :

• The Adani Group’s companies are highly leveraged, as was already mentioned. This indicates that they owe a sizable debt that must be settled. The majority of this debt is acquired through stock pledges from various corporations. The banks would be forced to sell the pledged shares, which would result in a huge decline in share prices if the worst were to happen and the Adani Group failed to repay its loan (which could be the case given the failure of its recent FPO which had the primary objective of repaying the debt).

The banks might panic that the value of their mortgage is reducing significantly and they might try to sell the shares as soon as they can, to recover as much as they can.

• The announcement that SEBI would be looking into the Adani Group on Friday (27th January 2023) provides another possibility for the demise of the Adani Empire. If SEBI discovered irregularities and the fact that the offshore company did hold illegal shares in the Adani Group, directly violating the SEBI rule that promoters cannot own more than 75% of the shares, it would force the shells to sell these shares, leading to an excess supply of shares in the market and a significant decline in the share price.

In essence, it is almost probable that Adani’s bubble of quick expansion has burst and that the corporation will surely experience slow growth and a setback. The Adani Group would no longer receive the kind of liberal loans that it had been receiving in recent years, as made apparent due to the scrutiny that the company received from SBI, the next-largest investor in the Adani Group after LIC. The positive news is that it doesn’t appear likely that this will have a significant, long-lasting impact on the entire Indian market, and this episode will serve as a reminder to the public to do their research before making market investments.