Partha Chakraborty-
(Partha Chakraborty, Ph.D., CFA, is an economist, a statistician, and a financial analyst by training. Currently, he is an entrepreneur in water technologies, blockchain and wealth management in the US and in India. Dr. Chakraborty lives in Southern California with his wife and teenage son. All opinions are of the author alone)
The headline on Hindenburg Research’s site screams murder, almost, in white against a black background. Published on January 24, it reads “Adani Group: How the World’s 3rd Richest Man Is Pulling The Largest Con In Corporate History”. The impact was swift and severe. Per FactSet, a data and research outfit, the combined market cap of seven publicly listed companies in Adani portfolio halved to $110 billion.
The net worth of. Gautam Adani – that once touched $147 billion, making him the third richest person, and was at $119 billion just before the report went out, according to Bloomberg billionaires Index – shrank to $59 billion on Saturday. Adani group scuttled a plan to issue a $2.5 billion Follow-on Public Offer (FPO), though latest reports say the group plans to repay $1.1 billion in debt.
Hindenburg Research hoped to profit by betting against the group’s US traded bonds and using derivatives that are not traded in India. The 104-page report alleged that Adani Group had engaged in fraud, including stock-market manipulation by using a network of overseas shell companies and questionable accounting and business practices. It said that offshore shell companies run by Adani’s older brother, Vinod Adani, helped the conglomerate manipulate its share prices, adding that shell companies are used “to maintain the appearance of financial health and solvency.” Hindenburg went on to say that even if its allegations were ignored, the Adani Group companies were so overvalued that their stocks could fall 85 percent.
On January 29, the Adani Group issued a 413-page rebuttal, calling the claims “stale, baseless, and discredited allegations,” and, “nothing but a lie.” Further, it labeled Hindenburg’s act a “calculated attack on India, the independence, integrity, and quality of Indian institutions, and the growth story and ambition of India.”
Within hours, Hindenburg replied, alleging, “Adani failed to specifically answer 62 of our 88 questions; of the questions it did answer, the group largely confirmed or attempted to sidestep our findings.”
The founder of Hindenburg Research, Nathan Anderson, 38, has a track record in digging for trouble. After college, he spent some time working at FactSet Research and was disappointed at the overwhelming burden of “compliance research”. As he set up Hindenburg Research in 2017, he used his passion for “digging and investigating” to find “man-made catastrophes” such as financial discrepancies, poor management, and hidden related-party transactions. These “scams” become his short-sale candidates, mostly smaller companies, on which he writes extensive reports.
In 2020, Hindenburg grabbed headlines and scored a win after publishing research on hydrogen-truck company Nikola Corp. and its founder Trevor Milton; Nikola subsequently paid $125 million to settle an investigation with the Securities and Exchange Commission. Last year, Hindenburg said it shorted shares in Twitter Inc. thinking Elon Musk would try to back out of his proposed acquisition of the company. Hindenburg also bet against another Indian business last year, payments company Ebix Inc, and sent its shares tumbling.
Anderson gets philosophical about what he does. “Most people want stocks to go up and humanity is very tribal… People can’t fathom that we are genuinely bearish on the companies that they love.” True that!
Gautam Adani is equally eloquent about what he does. He divides his decades long rise from obscurity into four phases, through multiple regimes. “But for Rajiv Gandhi, my journey as an entrepreneur would never have taken off”, he says in an interview with India Today in January, 2023 (before Hindenburg affair). He was referring to loosening of export import policy by the Congress administration of the day.
His next phase came under Congress administrations of PV Narasimha Rao, who, together with Dr Manmohan Singh, started the reform of Indian economy in 1991. Adani took risks and reaped rewards as did many others. His third phase came under the then Gujrat Chief Minister Keshubhai Patel, who focused on coastal development. That coincided with Adani setting up Mundra Port, the first big infrastructure project of the group and a stepping stone for many things he would later do.
The fourth turning point came under the next Gujrat Chief Minister Narendra Modi, currently the Prime Minister of India. Adani acknowledges his close relationship with Modi, but pooh-poohs any talk of favoritism. “You can talk to him about policy, discuss the interest of the country, but the policy is made for everyone, not for Adani Group alone,” he claims. Adani’s views represent a common refrain in corporate India of today – “You can ask the government for favorable policies but you can no longer ask for individual favors. You need sensible execution. It isn’t enough to just have political connections.”
Adani is a poster child for the Indian growth. His meteoric rise was marked by winning several government tenders and infrastructure projects in ports, airports, roads, rail and fossil fuels, across the country. In 2018, for example, Indian government allowed Adani to bid—and win—tenders for six airports. Although Adani had no prior experience operating airports, the decision turned his group into one of the country’s biggest private airport operators overnight.
Outside of infrastructure contracts, the group ventured into marine services, solar and renewables, commercial mining and mining services, cement production, food / fast moving consumer goods, and, many many others, both in India and internationally. Adani is pivotal in Modi government’s plans to nudge the economy from fossil fuels to clean energy, he has vowed to build three factories to make solar modules, wind turbines and hydrogen electrolyzers as part of his plan to invest USD 70 billion in cleaner technologies over the next decade.
“I don’t chase numbers. For me, the bigger question is, ‘What can I do for the nation,” Adani said in an interview in January 2023, echoing Modi’s mantra of nation-building. He has also been in difficult situations, including being trapped in the Taj Mahal Hotel in Mumbai in 2008 during the Mumbai terrorist attack. He says in the India Today interview, “When things are not in your control, why worry? Destiny decides such things. Even on days that have been traumatic, I sleep peacefully.” He needs some of that today.
Infrastructure is a capital-intensive business, so it is little surprise that Adani Group has a heavy debt burden. The group’s net debt sits at $19.63 billion, gross at $23.31 billion, according to Jefferies, an investment bank. Total debt at five major Adani companies rose about 76% from fiscal year 2019 to fiscal year 2022, per FactSet, Adani Enterprises’ ratio of net debt to trailing EBITDA is 5.8, much higher than peer Reliance Industries figure of 1.5., 29% of total debt is in foreign currency. Months before Hindenburg, debt-research firm CreditSights published a report describing Adani Group as “deeply overleveraged.”
If all of that is supposed to be in public domain, Hindenburg claims to have unearthed potentially criminal behavior.
Companies without a free float of at least 25% of shares risk being delisted under rules set by the Securities and Exchange Board of India. In the third quarter of the current financial year, which ends March 31, Adani family members and companies that have publicly disclosed ties to the Adani empire held 74.97% of Adani Power’s shares, according to corporate filings. Hindenburg claims to have traced control and ownership of multiple offshore funds with overwhelmingly vast majority of their holdings in Adani stocks back to Adani family and friends.
One such entity, Mauritius based Opal’s stake in Adani Power accounts for nearly 19% of the shares that Adani Power is required to float to independent shareholders – a potential infringement of the statutes.
Much of the trading activity in Adani Enterprises was traced to holding companies based in tax havens, leading to speculation that the stock was being manipulated – shares in Adani’s seven subsidiaries have soared more than 800 percent in the past three years. Adani companies’ trade roughly at 112-multiple to prospective earnings, a high figure for India, accounting for 9% of market cap of all listed firms in Bombay Stock Exchange. and Hindenburg claims much of that is essentially manipulation by related entities.
“Clearly there’s a disconnect between valuations and fundamentals,” says James Thom, senior investment director of Asian equities at investment firm Abrdn. NYU professor Aswath Damodaran opines that Adani group’s shares are still 40% overvalued; that, after the bloodbath of the last few days.
It is noted what Hindenburg Research does not allege. It does not allege operational malfeasance in Adani group’s projects, something like “Adani routinely mixes mud with cement and bribes inspectors to get necessary certificates.” Brushes with local law, especially skirmishes with native rights and environmental regulations, are not infrequent for companies involved in mining and large infrastructure projects. Debt burden of Adani companies is also public knowledge. Using information in public domain an astute analyst could pick out hints of related party issues. What Hindenburg did, and did quite well, is to collate all these information and connect the dots with painstaking effort.
How much of that is criminal offense is up to the courts, if and when, but we live in a world where perception is reality. With the bruising Adani related scrips have received since the publication, it is quite possible that market corrected what was clearly an overvaluation, on cue.
Adani group’s response leaves a lot to be desired. Embracing the national flag when accused to malpractice is an old trick that fools nobody. Adani’s embattled Chief Financial Officer Jugeshinder Singh stood in front of a giant Indian flag, drumming up nationalist support that appeared to signal a message that any foreign scrutiny of Adani was an assault on the success of India itself. After Adani Group issued its rebuttal last Thursday, hundreds of pro-Adani tweets with the hashtag, “#IndiaINCSupportsAdani,” flooded Twitter’s timeline. Social Media were riven with allegations of the West – the UK and the US included – colluding to bring down the resurgent India. People hyped up closeness of Adani group with powers that be, and passed a verdict of “guilty by association” for all. Those supporting market correction were accused of betrayal of Indian aspirations, bordering on being a traitor. Say what?
What the current saga reveals is the best of two opposing worlds. Gautam Adani dreamed big, took risks, nurtured relationships, and made the journey from being an obscure local trader to one of the richest in the world, all in less than four decades. Along the way he pushed the envelopes, a trait that comes with the territory.
Even with allegations of related party transactions, he is not hauled to a court, not yet. Nathan Anderson is young, clearly not afraid of hacking away at big trees, unfazed that the stub might fall upon him too. His meticulous research is clearly making a mark. We have no information as to his own profits from the trade, but he has cut down to size a formidable Bollygarch, the richest in India.
I would argue that a resurgent India needs both. It clearly needs Adani’s risk-appetite and the capacity to build bridges to get ahead, create wealth and build a nation.
As importantly, she needs loud voices that speak truth to power, backed with solid analyses that paint a picture nobody can miss, nor mess with. What India needs is a way to live with, and celebrate, both. Even the hullabaloo is nothing new, nor unwelcome, it is just that opposing voices are jostling for audience in a country where free speech is the bedrock of a civil society.
These opposite worlds, together, define the new India. As the country strives to double her GDP to USD 7.5 Trillion by 2031 – per projection by Morgan Stanley, a US investment bank – such skirmishes are bound to happen, and happen often. That does not diminish the story of India; she’s arrived at the grown-up table where there’s a place for all.
