Hindenburg Research-Adani Group- The Story So Far!

On
January 24, 2023, a US based short-selling firm, Hindenburg Research founded by
Nate Anderson specializing in forensic financial research, released a report
charging the Indian conglomerate Adani Group led by Gautam Adani as the
“largest con in corporate history”.
In
the report titled, “Adani Group: How The World’s 3rd Richest Man Is Pulling The
Largest Con in Corporate History, Hindenburg Research alleges that their
two-year investigation led to the revelation that the Adani Group has “engaged
in a brazen stock manipulation and accounting fraud scheme over the course of
decades.
According
to the report, Gautam Adani, Founder and Chairman of the Adani Group has a net
worth of roughly $120 billion which has increased by more than $100 billion in
the past three years primarily as a result of stock price growth in the group’s
7 key listed companies, which have increased by an average of 819% during that
time.
The
report said that Gautam Adani’s younger brother, Rajesh Adani, was accused by
the Directorate of Revenue Intelligence (DRI) of playing a central role in a
diamond trading import/ export scheme around 2004-2005. The alleged scheme
involved the use of offshore shell entities to generate artificial turnover.
Rajesh was arrested at least twice over separate allegations of forgery and tax
fraud. He was later promoted to serve as Managing Director of Adani Group.
The
report further alleged that Gautam Adani’s brother-in-law, Samir Vora was also
accused of the DRI for the same diamond scam and making false statements to
regulators, repeatedly. Vora too, was later promoted as the Executive Director
of the “critical Adani Australia division.
Hindenburg
states that the findings resulted in identifying 38 Mauritius-based shell companies
controlled by Gautam Adani’s elder brother, Vinod Adani and several other
similar entities based in Cyprus, the United Arab Emirates, Singapore and
several Caribbean Islands.
Vinod
Adani has often been at the focus of the government’s investigations into Adani
for his suspected role in overseeing a network of offshore businesses intended
to enable fraud.
The
report also pointed out the debt on the company and that it had taken a short
position in Adani Group Companies through U.S.-traded bonds and
non-Indian-traded derivative instruments.
Following the release of the report by Hindenburg Research, the Adani Group responded back on January 29, 2023, and stated the allegations put on them are “nothing but a lie”. It said that “the document is a malicious combination of selective misinformation and concealed facts relating to baseless and discredited allegations to drive an ulterior motive.”
In
the 413 page response to the U.S based firm, the Adani Group further said, this
is a “calculated attack on India, the independence, integrity and quality of Indian
institutions, and the growth story and ambition of India.”
Adani also claimed in its response that the “Madoffs of
Manhattan” have committed a flagrant breach of applicable securities and
foreign exchange laws.”
In response to the statements by the Adani Group, Hindenburg
disagreed with Adani’s nationalist statement; it said, “Fraud cannot be
obfuscated by Nationalism or a bloated response that ignores every key
allegation we raised.”
Hindenburg said the Adani Group “predictably tried to lead
the focus away from substantive issues and instead stoked a nationalist
narrative.”
“To
be clear, we believe India is a vibrant democracy and an emerging superpower
with an exciting future,” it said.
“We also believe that fraud is fraud, even when its
perpetrated by one of the wealthiest individuals in the world,” it added.
Following
the revelation, Gautam Adani’s position fell out of the world’s top 20 richest
people on Friday, February 3, after losing $12 billion in a day. Adani was
listed as the third richest person in the world, is now in the 17th
position, according to the Forbes’ Real Time Billionaire List. His net worth is
currently $61.9 billion, making Reliance Industries Chairman Ambani to become
the richest Indian in the world whose net worth is $83.0 billion, as of
February 5, 2023.
This
has also led to the withdrawal of the Rs 20,000 crore FPO of the Adani
Enterprises LTS (AEL) stating it would not have been morally correct in the
current market condition to go ahead with the FPO. Reports also say that Adani
Group would further refund the money to its investors.
Gautam
Adani’s wealth had declined 21.77 % or USD 16.2 billion.
This
turmoil has again led to the attack on the Narendra Modi-led government by the
opposition party who claimed that the Adani group hashigh exposure to financial
institutions such as the Life Insurance Company of India (LIC) and the State
Bank of India (SBI) and that the exposure has “implications for financial
stability and for the crores of Indians whose savings are stewarded by these
pillars of the financial system.”
The
Congress claims that Modi favours Adani, and is protecting his friend. They
further demanded a probe by SEBI, RBI against Adani group based on the
Hindenburg research.
The
Congress said that normally a political party shouldn’t respond or react to a
hedge fund’s research report on an individual company or business group. “But
the forensic analysis by Hindenburg Research of the Adani Group demands a
response from the Congress party. This is because the Adani Group is no
ordinary conglomerate: it is closely identified with Prime Minister Narendra
Modi since the time he was Chief Minister,” Congress communications head Jairam
Ramesh said in a statement.
The
banks, on the other hand, insisted that their exposure to Adani Group is not
concerning and that it is within the parameters set by the RBI.
According
to RBI exposure norms 2022, RBI permits to expose no more than 25% of its
eligible capital available capital base to one particular group of linked
entities. Reportedly, RBI said its overall exposure to the Adani Group is at
0.88 % of the book or around Rs 27,000 while LIC is at around 1%.
The
Congress even questioned the silence of the Modi led government on the issue or
even the silence of particularly the Union Finance Minister.
However,
on Friday, Finance Minister Nirmala Sitharaman broke silence and stated that
both State Bank of India (SBI) and Life Insurance Corporation (LIC) of India
have clearly said that “their exposure to Adani Group is very well within the
permitted limits and with valuation falling as well, they are still over
profit. That is the word from the horse’s mouth.”
She
also said that India is an absolutely well governed country and a very well
regulated financial market.
The
Adani-Hindenburg clash has led to revelations of older reports surfacing in
social media by critics. And based on these older reports, many of them are of
the opinion that Hindenburg is itself a fraud and that the company is currently
under investigation in the US.
So
is it really that Hindenburg is under investigation? Well, the reports which
have been covered by well known media outlets like that of Forbes, The
Financial Times etc, states that the US Department of Justice started
investigating dozens of prominent short-selling investment and research firms (since
2021) as part of a sweeping U.S hunt for potentially illegal trading tactics.
The probe aims to determine whether short-sellers used illegal trading tactics
to drive down stock prices by sharing damaging research reports ahead of time. Reportedly,
federal prosecutors have even seized hardware, trading records and private communications
during the investigation process.
The
reports further stated that both Nate Anderson and Hindenburg Research and
several others were among the prominent firms and short sellers who were
mentioned in DOJ request for information.
However, these firms have continued publishing reports on US entities even after the investigation led by US DOJ and thus it can be said that the firm is not banned in US as far as the question of banning of the firm in US is concerned, which has also been doing the rounds in the internet.
Now
the question is, how does Hindenburg is benefitted from publishing these
allegations? Hindenburg Research in its report against Adani mentioned that it
had taken a short position in Adani Group through U.S.-traded bonds and
non-Indian-traded derivative instruments.
So
short selling involves borrowing a security and selling it on the open market and
hopes to buy it back believing its price will drop in the future, thus profit from
it.
Therefore,
if Adani’s or a company’s stock fall because of the allegations published
through a report by Hindenburg Research, they automatically is profited from
the drop of the price as they took short positions in the Adani company.
According to reports, Hindenburg Research has released reports on more than 15 companies before Adani Group.
Sources-
Hindenburg Research report, Adani Group’s response, Forbes the World’s Real
Time Billionaires 2023 list, Media reports.
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