The sprawling empire of Gautam Adani, an Indian industrialist and one of the world’s richest men, seemed unstoppable until the US investor Hindenburg Research accused his company of “pulling the largest con in corporate history”.
As soon as markets opened in Asia after the report was published, spooked investors offloaded their positions in the seven main listed Adani companies. Within days, the Adani Group companies had shed more than US$100bn (£81bn) in value, representing almost half the market value of its stocks.
Its billionaire chairman has also dropped off the world’s Top 10 rich list, and the company’s much-vaunted share sale has been called off.
The report raises serious allegations of stock manipulation and accounting fraud that threaten to heap further pressure on the Ahmedabad-headquartered conglomerate, curbing its global ambitions.
The Adani Group – spanning ports, power, coal and renewables – has strongly denied the report’s claims, which it described as a “malicious combination of selective misinformation and stale, baseless and discredited allegations” and accused Hindenburg of attempting to damage its reputation before a large share offering. It has equated the 24 January report to an attack on India, while noting that Hindenburg, an US-based activist short seller, is profiting from the chaos.
Who is Adani and what companies has he founded?
Adani is from a textile family in the western Indian state of Gujarat, the same industrial area as the prime minister, Narendra Modi, hails from.
With a background in commodities trading and diamond sorting, Asia’s richest man expanded his business into a US$220bn ports-to-power conglomerate that includes seven listed companies on Indian exchanges, as well as numerous private companies.
In the past three years, Adani’s net worth increased by about US$100bn on the back of huge share price increases in the listed companies.
The Indian conglomerate remains heavily tied to coal, which includes its Carmichael mine and rail project in Queensland, Australia, that faced fierce opposition for its expansion of the use of thermal coal and environmental impact on the Great Barrier Reef.
Part of Adani’s appeal in India is that its assets, which include fossil fuels but also solar and wind power plants, are seen as an answer to the growing energy needs of the fast-expanding economy.
What is Hindenburg Research and what did it do to Adani?
Founded by the investor Nate Anderson in 2017 and named after the 1937 airship disaster, Hindenburg is a US financial firm that analyses listed companies, with a focus on finding tradable entities that it believes have too much debt and are poorly, or fraudulently, run.
Hindenburg then seeks to profit from their crashing share prices.
On 24 January, it released a report targeting Adani companies that it said was the result of a long investigation. The value of the seven listed Adani companies have been heavily sold off on Indian stock exchanges in the aftermath.
What do short sellers do?
Conventional shorting involves an investor betting that a particular asset will fall in value, traditionally done in markets that allow investors to “borrow” a security, sell it, and then buy it back hopefully at a lower price.
There are other more complex financial instruments that can be used to profit from falling prices that usually involve two parties making a contract.
Activist short sellers like Hindenburg typically take a short position in a tradable company they believe is heavily overvalued before releasing their reports to the public, in expectation that investors will then drive down the price of their targets.
In a report disclaimer, Hindenburg noted that it stood to realise “significant gains” if prices of the Adani companies fell. It also said it would continue transacting after the report was published and that it could be “long, short or neutral”. This means its current position is unclear.
The Adani Group has attacked Hindenburg’s motives to profiteer at the cost of the conglomerate.
“The allegations and insinuations, which were presented as fact, spread like fire, wiping off a large amount of investor wealth and netting a profit for Hindenburg,” the group said in a lengthy rebuttal published on 29 January.
Hindenburg doesn’t deny it will profit but does deny any wrongdoing; its defence is that the report is accurate and the result of a two-year investigation that included site visits in several countries.
What are Hindenburg’s main allegations?
The most dramatic allegations refer to what Hindenburg claims is a “brazen stock manipulation and accounting fraud scheme” that has driven up the price of the listed Adani companies and inflated the net worth of its billionaire chairman.
Hindenburg alleges that this is done by using shell companies to manipulate the price of the listed ones by holding large positions. Shells are also used to “launder” money on to the listed company balance sheets, which helps to maintain the appearance of financial health and solvency, Hindenburg said.
Those funds can then be shifted around to Adani entities where capital is needed.
Separately, Hindenburg cited transactions connected to the Australian operations that it alleges may have allowed Adani to avoid disclosing large drops in the value of its assets by shifting them to a private company.
The US company also alleges that the listed Adani companies have substantial debt, putting the entire group on a “precarious financial footing”.
Hindenburg cited a high turnover of chief financial officers at the group’s listed flagship Adani Enterprises as a red flag, as well as the use of “relatively unknown” auditors.
How has Adani responded?
Adani has published a 413-page rebuttal denying all of the allegations that it said Hindenburg made to book massive financial gains.
Notably for investors, it said the amount of borrowed money its companies use was in line with industry benchmarks, and that any dealings with related parties were properly accounted for.
Adani notes that several of the financial officers Hindenburg referred to were still working for the organisation in different roles, and it said audit committees of the listed companies were entirely composed of independent directors.
It described the report as a “calculated attack on India, the independence, integrity and quality of Indian institutions, and the growth story and ambition of India”.
What happens next?
The report was released on the eve of a major fundraising campaign designed to pay off debt and finance expenditure at Adani.
The group was able to complete the US$2.5bn share offer with the help of major investors such as Abu Dhabi’s International Holding Company, which tipped in about US$400m. But it then called off the offer after a renewed slump in its share prices meant participating investors would be sitting on immediate and large losses.
During the fundraising attempt, social media posts in India praising Adani gained traction, with “#IndiaStandsWithAdani” a trending hashtag on Twitter. Some Indian politicians expressed their support for Adani against “foreign interests”.
Battles between short sellers and their targets can play out over extended periods. If the allegations continue to weigh on Adani and regulators believe an investigation is warranted, then the company’s ability to raise funds will be curbed, hampering its operations.
Adani’s Australian business said neither the securities regulator nor tax office had contacted the group about the report.
There is also a question over whether Adani’s global banking financiers reassess their exposure to the group.
In the meantime, Adani is trying to assure investors that its companies are safe to invest in and offer growth prospects, which would help stabilise the share prices of its listed companies.
To date, there has been no sign of easing pressure, with the abandoned share offer sparking renewed selling of shares in Adani companies. Some Adani bonds have plunged to distressed levels, such is the fear among investors.
