Hindenburg Research, a well-known short seller in the United States, disclosed short positions in the Adani Group on Wednesday, accusing the conglomerate of the improperly broad use of companies based in offshore tax havens and raising concerns about excessive debt levels.
What the Hindenburg report says
The firm published a research paper titled ‘Adani Group: How the World’s Third Richest Man Is Pulling the Biggest Scam in Corporate History‘ and revealed the findings of its two-year investigation presenting evidence that the Adani group, valued at Rs 17.8 trillion, it has engaged in a brazen scheme of stock manipulation and accounting fraud for decades.
According to the report, Gautam Adani, the founder and chairman of the Adani Group, has a net worth of about $120 billion, which has increased by more than $100 billion in the past three years, mainly as a result of the growth in the price of actions in the group top seven publicly traded companies, which have risen by an average of 819 per cent during that time.
Hindenburg says it identified 38 alleged Mauritius-based shell companies “controlled by” Vinod Adani, Gautam Adani’s older brother, along with several other similar companies based in Cyprus, the United Arab Emirates, Singapore and various Caribbean islands.
Stock manipulation and money laundering
The report alleges that the shell companies are used for “stock manipulation” and “money laundering”, using the private companies of the Adani Group on the books of publicly traded companies “to maintain the appearance of solvency and health financial”.
The report also criticizes “investors, journalists, citizens, and even politicians,” saying they held back on “big blatant fraud [taking place] in broad daylight” for fear of retaliation. As of Wednesday morning Later, the Hindenburg report received little coverage in the Indian media outside of syndicated reports from business news agencies such as Reuters or Bloomberg.
Hindenburg Research said the Adani Group companies are intricately and clearly linked and dependent on one another. None of the listed entities is isolated from the performance, or failure, of the other companies in the group. “We believe that it could take a single severe liquidity event in a single entity to trigger a negative cascade of events in other entities in the group that could affect the entire Adani Group.”
Adani companies under liquidity risk
Four of Adani’s publicly traded companies are near the delisting threshold due to high developer ownership, according to a report published by Hindenburg Research, an investment research firm that focuses on sales in short activists.
The report also said that five companies in the group (all but Adani Ports and Adani Wilmar) have current ratios below 1.0, suggesting increased near-term liquidity risk. Furthermore, Adani Wilmar, a new company with current insider ownership of 87.94%, must reduce its insider holdings to 75% by early 2025 to meet these requirements – a significant feat requiring the offloading of 12.94% of its current insider equity.
Listed companies in India are subject to regulations requiring all promoter holdings to be disclosed. The rules also require publicly traded companies to have at least 25 per cent of the free float held by non-promoters to mitigate manipulation and insider trading.
Adani Enterprises, Adani Transmission, Adani Power and Adani Total Gas report that more than 72 per cent of their shares are held by insiders. In addition, Adani Wilmar, a new company with a current 87.94 per cent insider ownership, must reduce its insider holdings to 75 per cent.
The report says that for many Adani-listed companies, a large portion of their “public” shareholders are funds based in the opaque jurisdiction of Mauritius. “Importantly, the funds identified in this section, which we believe should be classified as ‘promoting’ (internal) entities, hold enough shares of Adani-listed companies to put four of them well above the 75% threshold, which causes delisting.
An offshore network
While many of the allegations made by Hindenburg against Adani had already surfaced, including overvaluations and concentrated holdings of Mauritian-based investors in his companies, some details collected from across the Mauritian registry have been made public for the first time, according to Brian Freitas an Auckland-based analyst who publishes independent research on the Smartkarma website.
Hindenburg said he had taken a short position in Adani’s companies through US-traded bonds and non-Indian-traded derivatives. Here is a quick summary of some of the main accusations made by him:
- 1. 38 Mauritian shell entities controlled by Adani’s brother Vinod Adani or his close associates were identified, as well as entities controlled by him in other tax havens.
- 2. The fictitious offshore network appears to be used for profit manipulation.
- 3. Adani Group has previously been the focus of four major government investigations related to fraud allegations.
- 4. Adani Enterprises and Adani Total Gas appear to be audited by a small company, with no current website, only four partners and 11 employees and have only audited one other publicly traded company.
- 5. The auditor “hardly seems capable of complex audit work” when Adani Enterprises alone has 156 subsidiaries and many more joint ventures.
Bull Run Slowdown
Adani’s companies trade at a price-earnings ratio many times that of similar companies both in India and around the world, including companies in the Reliance empire of rival tycoon Mukesh Ambani, Adani’s predecessor as the world’s richest man from Asia. There are some signs that the bull run is slowing, with most shares in the Adani group starting the year lower even before the Hindenburg report.
Investors and analysts have also raised concerns about the high debt levels seen in the empire’s listed units. The gross debt of six Adani companies (Adani Enterprises, Adani Green Energy, Adani Ports, Adani Power, Adani Total Gas and Adani Transmission) stood at Rs 1.88 trillion ($23 billion) at the end of March 2022.
“Even if you ignore our research findings and take Adani Group’s financials at face value, it’s seven key publicly traded companies are down 85% purely fundamentally due to sky-high valuations,” Hindenburg said in the report.
Adani rejects Hindenburg report
Adani Group CFO Jugeshinder Singh has rejected the Hindenburg report, stating that it is “a malicious combination of targeted misinformation and rancid, baseless and discredited accusations that have been proven and rejected by Indian courts.”
The statement adds that Hindenburg never contacted the company and criticizes the timing of the report’s release, saying it “clearly betrays a brazen and bad faith intent to undermine the reputation of the Adani Group with the primary aim of damaging the next public offering of the company.
Adani Stock Plunge
Shares of the Adani group of companies fell sharply during the morning trading session on Wednesday. Shares of seven Adani group stocks lost ₹55,000 crore in market capitalization (m-cap) shortly after the report came to light.
Hindenburg’s broadside comes at a critical time for Adani. The tycoon is seeking to raise his international profile and is aggressively branching out into new businesses, including cement and media, in his Indian power base, where he is seen enjoying a close relationship with Prime Minister Narendra Modi. The expansion plans of the Adani empire are closely aligned with the government’s development and economic goals.
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