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 17^th 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.