In today's Finshots we summarize the tussle between Adani Group and Hindenburg Research

The Story

First things first. This is an attempt to summarize two documents that span over 50,000 words in a mere 1,700 words. So we will have to omit several key details to maintain brevity. Two, this is a developing story with massive implications for the stock market ecosystem. So if you are a shareholder on the fence shuffling between “buy/sell” decisions, we urge you to take this story with a pinch of salt. This is a brief summary only intended to offer an overview of the current situation. It should not be used as a substitute for the actual documents (Hindenburg’s report and Adani’s response). Please read them in full before forming an opinion.

With that introduction out of the way, let’s get to the crux of the matter.

Hindenburg is a research company and a short seller. Short selling is the act of betting against a company’s stock. The theoretical mechanics of short selling is rather simple. You borrow a certain number of shares of a company from your friendly neighbourhood broker and you sell these shares at the current market price — say Rs.100. At some point in the future when the stock price dips (to Rs.80), you buy the company shares from the open market and return it to the friendly neighbourhood broker. The transaction is settled and you make a decent profit (of Rs. 20).

But Hindenburg doesn’t just bet against stocks. They also release a very detailed report afterwards outlining why they are shorting the stock in the first place. They do this in the hope that others can join in on the bandwagon and further beat the stock down. In the past they have called out companies like Nikola (you can find a Finshots explainer here) and Eros International. In fact, when the founder of Hindenburg published a report against the Bollywood production house, Eros took him to court. Eventually though he hired a private investigator and found even murkier details — a payment to the tune of $153 million — from Eros to an entity run by the CEO’s in-law. The company’s stock price has fallen by 90% in the past 5 years. Needless to say Hindenburg has found considerable success following its now infamous playbook.

Their recent target is Adani and they released a massive report last week outlining allegations of corporate fraud and stock market manipulation.

Adani meanwhile believes that Hindenburg’s motives are questionable. They argue that the research is flawed and it fails to make any substantive allegations against the company. They also note that this is an attack on the Indian growth story by “vested interests” and soon released their own rebuttal answering Hindenburg’s many pointed questions.

So let’s look at some of the big allegations.

Allegation 1: Hindenburg believes several of Gautam Adani’s associates have had past run ins with the law and yet serve on the board right now. They give a few examples to prove their point. Chief among them is an investigation by the Department of Revenue Intelligence (DRI) that implicated Samir Vora, Gautam Adani’s brother-in-law in the diamond trading scam.

Adani dismisses these claims by stating that the order from the DRI was set aside by a higher authority (CESTAT) with a review petition being subsequently dismissed by the Supreme Court. They also note that other allegations outlined by Hindenburg have also similarly been dismissed by various adjudicating authorities and courts in India.

Allegation 2: Next, Hindenburg alleges that several entities connected to Vinod Adani (Gautam Adani’s brother) have dealt with Adani companies (and shares) without disclosing the true nature of these transactions. For the uninitiated, it is a legal requirement for listed companies to outline “related-party transactions.”

So these are grave allegations. Especially since Hindenburg believes that

  1. Vinod Adani dabbled with these stocks to artificially inflate their price
  2. He used off shore entities to move money from private companies (whose financials may not always be transparent) to Adani’s publicly listed companies — just to boost their financial health temporarily.

They also note that several of Vinod Adani-associated entities have no obvious signs of operations, including no reported employees, no independent addresses or phone numbers and no meaningful online presence.

So they conclude that these must be shell entities (dummy companies) only propped up to perpetrate corporate fraud.

Adani’s response is this — “Vinod Adani does not hold any managerial position in any Adani listed entities or their subsidiaries and has no role in their day to day affairs. As such, these questions have no relevance to the entities in the Adani portfolio and we are not in a position to comment on your allegations on the business dealings and transactions of Mr. Vinod Adani.”

In conclusion, Adani argues that he is not a related party. And as such, they are under no obligation to list these dealings publicly.

They also further reiterate “that any transactions by the Adani portfolio companies with any related party have been duly identified and disclosed as related party transactions in compliance with Indian laws.”

Allegation 3: Hindenburg flags a particular transaction between Adani group companies and AdiCorp Enterprises — an entity allegedly owned by a friend of the Adani's. 4 Adani companies lent $87 million to AdiCorp despite AdiCorp having made a measly $97,000 in profits. This, they believe is highly unusual considering the size of the loan. They also go on to note that AdiCorp immediately funnelled 98% of those loans to Adani Power — another inexplicable move. And so they conclude that Adicorp was simply used to route funds from various Adani Group companies to publicly listed Adani Power.

Adani’s response can be summarized in one line — “Adicorp is not a related party and as such they are under no obligation to divulge the details to their shareholders.” Adani however doesn’t explain why they extended the loan.

Allegation 4: Hindenburg also lists other “suspect” transactions and asks the group for clarity. Chief among them include a ~$200 million loan made out by a “silver merchant” to Adani Infra (private company) and a ~$600 million loan made out by a Mauritius based entity to Adani Infra once again. Both entities are owned by people either directly or formerly associated with the Adani group. In its questionnaire, the research company asks Adani Group for the source of funds — with the tacit suggestion being that these entities were used to move money between group companies.

Adani’s response once again notes that these are not related party transactions and as such, they don’t offer clarification on the source of funds.

Allegation 5: Hindenburg argues that Adani Group moved money into listed companies and moved them out when convenient, thereby greatly eroding shareholder wealth. One example they quote includes a payment made by listed Adani companies to private contractor PMC. The payments add up to $783 million over a 12-year time span. Hindenburg alleges that PMC project was simply a dummy firm for Adani group — based on charges framed by the Department of Revenue Intelligence.

Adani meanwhile points to an order by higher adjudicating authorities who note that the two firms are independent entities. The group dismisses the claim entirely based on this order.

Allegation 6: Hindenburg also believes that Adani’s convoluted corporate structure is a deliberate design feature used to hide their many shady dealings. For instance, Adani’s 7 key listed entities collectively have 578 subsidiaries. They also allege that Adani firms in the past have seen a spate of exits — primarily their CFOs (chief financial officers). Adani Enterprises for instance has had 5 CFOs in the past 8 years. And despite the company’s seeming complexity, they’re audited by Shah Dhandharia — an entity with only 4 partners and 11 employees. Hindenburg believes that these are clear red flags.

Adani no doubt refutes these allegations. They argue that infrastructure companies are by design complex due to the very nature of their business. For instance, new infrastructure projects are  housed in separate companies (SPVs) to protect the group’s downside and to meet certain regulatory requirements. So if you are dealing with multiple projects over several years, you are bound to have a whole host of new entities. They also argue that the CFOs have only resigned to take up newer, bigger roles in other Adani group entities. They also list several examples to make their point. Finally they argue that their accountants are perfectly capable of auditing their business while noting that several Adani entities are audited by the big 4 — the likes of EY, PwC , Deloitte and KPMG.

Allegation 7: The research firm then points to a list of funds based in Mauritius who have seemingly invested nearly $8 billion in Adani group companies. Their allegation is simple — These funds almost exclusively hold massive shares in listed entities of Adani Group. They believe this is highly unusual for funds of this size. Take Elara India Opportunities Fund — According to Hindenburg, they’ve invested close to $3 billion in Adani group companies, with one of their funds deploying almost 99% of their capital in these entities. They also allege that some of the directors in these funds are loosely connected to Adani group companies. The CEO of one of these funds served as director in 3 companies alongside diamond merchant Jatin Mehta, whose son is married to Vinod Adani’s daughter.

So Hindenburg asks — Are they really acting independently? And if they are acting at the promoters’ behest, are they breaching SEBI rules on the amount of shares promoters (and their group) can hold in publicly listed companies? And if not, why are they holding Adani shares almost exclusively? And where did they get the money for all this?

Adani’s response is curt — They note that these are all independent shareholders and any innuendos suggesting that they may be connected to Adani group promoters is incorrect. And as such they refuse to qualify these questions with a response arguing that they couldn’t possibly have any information about public shareholders.

Allegation 8: Hindenburg also draws attention to Adani’s harsh response to people critical of Adani’s operations. They argue that the group has initiated legal action against journalists, despite Gautam Adani’s public claim that he welcomes criticism. So they ask — Why do this if you’re open to differing opinions?

Adani’s response is firm once again. We quote “Being open to introspection or understanding others point of view does not mean we have given up our legal right to defend ourselves, our businesses and other employees through proper legal channels. We have exercised our rights in this matter in due compliance with law and through proper judicial processes in this respect.”

After Adani’s response, Hindenburg shot back with another memo, standing by its research. They wrote -

"[Adani Group] has tried to lead the focus away from substantive issues and instead stoked a nationalist narrative, claiming our report amounted to a “calculated attack on India.” In short, the Adani Group has attempted to conflate its meteoric rise and the wealth of its Chairman, Gautam Adani, with the success of India itself. We disagree. To be clear, we believe India is a vibrant democracy and an emerging superpower with an exciting future. We also believe India’s future is being held back by the Adani Group, which has draped itself in the Indian flag while systematically looting the nation.

We also believe that fraud is fraud, even when it’s perpetrated by one of the wealthiest individuals in the world. In terms of substance, Adani’s ‘413 page’ response only included about 30 pages focused on issues related to our report. The remainder of the response consisted of 330 pages of court records, along with 53 pages of high-level financials, general information, and details on irrelevant corporate initiatives, such as how it encourages female entrepreneurship and the production of safe vegetables."

So with that volley, the ball is in Adani's court now. How will they respond? We will just have to wait and see.

Until then….

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