Adani vs Hindenburg: Which side are you on?

"Every economic opinion is associated with a set of assumptions." - Gautam Adani

In a little more than a week since the New York-based investor research firm Hindenburg Research accused the conglomerate led by billionaire Gautam Adani of "brazen stock manipulation and accounting fraud over decades," the shares of Adani Group firms have plummeted. Adani, who was formerly the wealthiest Indian in the world, is now ranked 22nd on the Forbes Real-time billionaire list for 2023.

So, what is going on actually?

On January 24, US short-seller Hindenburg Research published a report accusing Adani Group of unlawful use of offshore tax havens and highlighting concerns about significant debt, causing the Group's prices to plummet.

The group maintains short interests in Adani group firms. Hindenburg Research stated that there is evidence that the Group has participated in decades of flagrant stock manipulation and accounting fraud.

What does the Research say?

Hindenburg Research stated in its analysis that the seven listed firms of the Adani group have a fundamental downside of 85 per cent due to sky-high valuations. The report highlighted the company's debt. "Key listed Adani companies have taken on enormous debt, including pledging shares of their inflated stock for loans, placing the entire group on shaky financial ground. Five of seven major publicly traded corporations have reported 'current ratios' below 1, indicating near-term liquidity strain, according to the research.

According to the research, eight out of twenty-two significant positions are held by relatives of Gautam Adani, founder and chairman of the Adani Group.

Hindenburg posed some questions at the end of the report:-

• In 2004-2005, the Directorate of Revenue Intelligence (DRI) accused Rajesh Adani, the younger brother of Gautam Adani, of playing a significant role in a diamond trade import/export scam. Subsequently, he was arrested twice on suspicion of customs tax evasion, import document forgery, and illicit coal imports. Why was he then appointed to Managing Director of the Adani Group, given his past?

• Samir Vora, the brother-in-law of Gautam Adani, was charged by the DRI with being the ringleader of a diamond trading scheme and of making false statements to authorities on multiple occasions. Why was he then appointed to Executive Director of the crucial Adani Australia business, given his past?

• What has been Vinod Adani's overall participation in the Adani Group, including all roles on deals and companies transacted with the Adani Group, to date?

• According to the report, the Adani Group has been the subject of four significant government fraud investigations including allegations of money laundering, theft of taxpayer funds, and corruption, totalling an estimated $17 billion. The report alleged that Adani family members collaborated to create offshore shell entities in tax havens such as Mauritius, the UAE, and the Caribbean Islands, generating forged import/export documentation in an apparent effort to generate fake or illegitimate turnover and syphon money from listed companies.

Adani's FPO and the retraction

Despite stock market turbulence, corporations and foreign investors fled out Adani Enterprises Limited's FPO on Tuesday. In contrast, the retail investors' portion was just 0.12 times subscribed (12 %), with investors vying for 27.45 million shares against the quota of 2.29 million shares. The employment quota remained undersubscribed, with only 55% of the quota receiving bids. Reuters reported that the decline in Adani Group stocks and bonds began on Wednesday, with shares of Adani Enterprises falling 28% and shares of Adani Ports and Special Economic Zone falling 19%, their worst day on record.

On Wednesday, the share price of Adani Enterprises plummeted by more than 34% to a day's low of ₹1,942 compared to its previous closing price of ₹2,975, well shy of its lower circuit's ₹1,933.75 low. The shares ultimately closed 28.45% lower at ₹2,128.70. Credit Suisse Group AG even ceased accepting Adani Group company bonds as collateral for private banking clients' margin loans.

Reports said that the Swiss lender's private banking arm assigned zero lending value to notes sold by Adani Ports and Special Economic Zone, Adani Green Energy, and Adani Electricity Mumbai Ltd. When a private bank reduces its lending value to zero, clients are often required to provide additional cash or collateral, and if they fail to do so, their stocks may be liquidated.

Adani Enterprises then cancelled its ₹ 20,000 crore follow-on public offering (FPO), the company announced in a regulatory filing on Wednesday evening (February 1). On Tuesday, the business will return the funds it obtained from its FPO, which was primarily bailed out by corporations and international investors.