Adani vs. Hindenburg: The Corporate Battle Rocking the Business World

The Adnai group has been in the news for quite some time, and lets just say for not so good reasons. The recent Adani-Hindenburg faceoff has sparked intense discussion and controversy in the financial and the business ecosystem. The stocks of Adani group have been witnessing a bloodbath for the past few days. The story is still developing and hence it has massive implications for the stock market ecosystem. The whole scenario is heated up, with the research company accusing the Adani group going on to say that they are dealing with the biggest scam in corporate history of India.

Adani Group, founded by Gautam Adani, is a multinational conglomerate headquartered in India, with interests in various sectors including ports, agribusiness, energy, real estate, and defense. The group has a flagship project of making the largest private port in India- Mundra Port. Adani Group has expanded its reach into other countries and industries, establishing itself as a major player on the global stage. Hindenburg Research, on the other hand, is a New York-based investigative and investment research firm with a focus on activist short-selling founded by Nathan Anderson in 2017. It has a track record of sending the stock prices of their targets tumbling. Hindenburg Research in 2020 wrote a report on Nikola, a company in the electric-vehicle industry whose founder, according to Hindenburg, made misleading claims to ink partnerships with top auto companies hungry to catch up to Tesla. Well then what happened to the company? Nikola came under the scrutiny of the government and the investors. Later by the end of 2021, Nikola agreed to pay $125 million to settle SEC (U.S. Securities and Exchange Commission) charges indicating that it defrauded investors by misleading them about its products, technical advancements, and commercial prospects. That's how powerful the claims of Hindenburg Research are. It did the same with Eros International. When Hidenburg published the report against the Bollywood production house, Eros took the company to court. Eventually Hidenburg hired a private investigator and got even more dirt on Eros International- a payment of $153 million to an entity run by the CEO’s in law. The company’s stock price has fallen by 90% in the last 5 years and Hindenburg has made considerable profits out of it. But how will Hindenburg profit from putting up these allegations? Well Hindenburg is a short selling research firm. It takes a short position on the companies they are targeting and makes money if the investment’s price falls. If the price of a company’s stock or bonds falls because of the negative attention from the report, Hindenburg can make huge profits from it. Along with taking a short position and betting on the stock, it further releases a detailed report on why they are shorting the stock in the very first place. By doing so, they hope that others can also join them and further beat the stock price down. This is exactly what they did with the Adani group.

Fast forward to the present scenario, Hindenburg released a massive report on 24th January on their latest target with accusations of corporate fraud and stock market allegations. The report outrightly said that the Adani group is violating SEBI (Securities and Exchange Board of India) rules by holding more shares that a public company should have. As per SEBI guidelines 25% of the company holdings should be with the public. During an IPO the founders and promoters cannot hold more than 75% of the company. But here is the twist: The report claims that although the founders and promoters are holding only 75% , the remaining 25% are being held by the shell companies. They also claimed that Adani is rolling its money in their company itself. For example, Tata group is a huge conglomerate in India with its reach in many sectors. Now, if Tata power needs to make software, they will go to TCS (Tata Consultancy Services) and pay them for their services. Now if 80-90% of TCS’s business is coming from Tata’s business then the money is rolling in the same company. Now if someone invests in TCS and Tata Power gets into some trouble, then the impact will also be seen for TCS. In here TCS is overdependent on Tata companies only. And as per Indian Accounting Standards it is not illegal to do so. But disclosures are important. And as per the reports Adani Group has not disclosed many of such transactions. The report also emphasizes Adani’s link with Ketan Parekh who is known for manipulating the stock prices. The SEBI had prosecuted Adani in the past for the same. Ketan Parekh did circular trading thereby artificially increasing the stock prices of the company. From 2020 to till date (before the Hindenburg report), Adani’s stock prices have increased manifold. So much of the price increase in just 2 years raises some very serious questions. And given their history with Ketan Parekh, the speculation of them repeating the same thing has increased. Also the growth of Adani has been exponentially high. Before 2014, he was the 600th richest man in the world. And before the report of Hindenburg was published he was the third richest person in the entire world.

Many more accusations of fraud, money laundering, dummy companies, shady dealings and spate of exits of the groups CFO’s ( 5 CFO’s in the past 8 years) have been put up by Hindenburg. Adani Group’s financials are audited by Shah Dhandharia — an entity with only 4 partners and 11 employees. Hidenburg claims that this stands as a red flag. A company as big as Adani Group can easily get their accounts audited by the Big 4 (KPMG, Deloitte, EY and PwC) , but they chose a small firm. Adani argued that the CFOs have only resigned to take up newer, bigger roles in other Adani group entities. They also argued that their accountants are perfectly capable of auditing their business and that some of their entities are also audities by the Big 4. However, the point here is that the Big 4 companies have also been involved in many major scams, so having chosen a relatively smaller firm for auditing their finances doesn't prove that they are pulling up a scam. But the biggest red flag is the amount of debt the Adani company has and its implications on the markets. When a company takes out a loan, the promoters of the company pledge their shares as a mortgage. Suppose a loan of Rs. 1000 crores is taken, then the shares with the value of minimum 2000 crores have to be mortgaged. That means the company gets the loan of only 50% of its share. Now if the allegations of the Hindenburg Research is true, that the Adani Enterprises are artificially inflating their share price, then the banks which have given them the loan have no value. They just have inflated value. The banks don't care about Adani's value, the only thing which matters to them is the value of Adani's shares. Meanwhile Adani believes that Hidenburg’s motives are questionable. They argue that the research is flawed and it fails to make any substantive allegations against the company. They even went on to say that Hindenburg is attacking India's growth by “vested interests” and soon released their point of view which was mostly turning down all the allegations by Hidenburg. After Adani’s response, Hindenburg shot back with another response, 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. 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." Hindenburg is a short selling company. What matters the most to them is the market inefficiencies. After knowing this, they prepare a detailed report and publish it. People start to panic and the share prices start to decline. This is what exactly happened in the case of Adani. And after all these things Hidenburg earned billions of dollars.

So there you have it folks! The whole saga of Adani and Hidenburg. SEBI has also started its investigation into Adani Group’s relationship with other shell companies. Gautam Adani's companies have lost over $110 billion in market value since Hidenburg attacked them. The entire market crisis has also taken a political turn with Adani’s ties with PM Narendra Modi have come under scrutiny. So with the ball in Adani’s court now, let's wait and watch where this controversy will end.