Hindenburg Research report on Adani
KAKALI DAS
Have you ever played Jenga?
If yes, then you must know how one tiny mistake can make the building fall. Something similar happened when Hindenburg wrote a report on Adani Enterprises’ fundamentals as well as alleged stock market manipulation.
Lot of back and forth between Hindenburg and Adani happened over the past week already. On Monday, 6 Feb, four of Adani stocks hit the lower circuit. Other stocks aren’t faring well either – Adani Gas lost steam as it fell 40% (but there is more).
Adani group called this a calculated attack on India as all has been proven in court. Hindenburg stands by its report, saying fraud can be done even by the richest.
Is Adani really the biggest Corporate- con in the world? Or is it conspiracy against Adani?
Whoever is right – I can’t get my head around Adani’s claim of Hindenburg’s calculated attack on India. Thousands of companies flourish in our country, and questions on Adani were raised even before (like on The Morning Context).
Fitch Group also said Adani companies were overleveraged. Adani should not hide behind nation and sue Hindenburg instead, or buyout. But nationalism cannot become a cover for a politician or a businessman.
On 24 January, Naatu Naatu’s Oscar nomination filled ourselves with pride – at the same time, a report by Hindenburg (that employs 5 people) attacked the erstwhile world’s 3rd richest person, Gautam Adani’s reputation. This small-time company, Hindenburg, caused a loss of $70 billion. Banks that banked on Adani and especially LIC stock also took the hit, eventually sliding Adani down to 15th on the list of the world’s richest people.
Short-seller research company Hindenburg is behind all this – their target was specifically Adani Group with the headline – “How the world’s 3rd richest man is pulling the largest con in corporate history.” How much of that is true?
But, first, what is short selling? Usually, you make a profit on a stock when its price goes up. But, in short selling, you predict the downfall of a stock and make profit when its price slips. Harshad Mehta also gave an example of this.
That’s what Hindenburg Research company does. They analyse something fishy in a company and make it public, taking a position against the company to earn profits. However weird, but short selling is a legal activity, and in fact, companies like Hindenburg keep track of the stock market. Otherwise this is the job of market regulator.
In 1937, Hindenburg was among the largest airships in the world – it was like Titanic in the sky – the future of air travel. However, an unfortunate disaster on the airship caused many fatalities and in 40 seconds, airships became a meagre part of the aviation history.
In 2017, Nathan Anderson founded Hindenburg Research to find fishy companies, release a report after thorough research and cause Hindenburg effect on the stock market.
One thing to clarify is that Hindenburg does this for their own profit. Like with a company named Nikola – Hindenburg claimed wrongful activities on part of company founder, including fraud and manipulation. After this research, the share price of Nikola fell from $60-65 range to $2.5.
By short-selling, Hindenburg Research made quite a lot of money and this is what they do. However, in the US, they are not termed anti-national or anything. In fact, they are held in high regard.
Something similar happened on 24 January 2023 – Hindenburg Research pointed out issues with Adani group of companies. The list of allegations is long, but let us go through some headlines, to make up our mind –
- Hindenburg Research found that in 7 listed companies of Adani, a meteoric $100 billion rise in stock price in 3 years – that amounts to average hike of 820%. (Btw, what was your average hike in 3 years?) Sensex as an index grew 50% – what exception did Adani companies do in the pandemic that skyrocketed their growth?
- Report also says that 8 of 22 key members in Adani group are family members. Hindenburg Research has said the family is controlling the stock, from different entities.
- Money laundering investigations are ongoing, and the allegation is of establishing shell companies in Mauritius, Cayman Islands.
- Younger brother Rajesh Adani was involved and arrested in a diamond trading fraud by directorate of revenue intelligence (he is now the MD of Adani group).
- Hindenburg identified 38 shell entities, with no business setup or operations in Mauritius, investing billions of dollars and controlled by elder brother Vinod Adani. Hindenburg says this is a violation, while Adani group says those are independent companies. Then where did investment money come from? – Hindenburg asked.
- A 2007 SEBI ruling stated that charges against Adani in manipulating scrip of Adani stand proved – this matter was solved in court, replies Adani group.
- Independent auditor for Adani Enterprises and Adani Total Gas called Shah Dhandharia is a tiny firm that does not even have their own website, and shows that it had only 4 partners and 11 employees. In short, an auditor checks for accounting frauds, but the auditor itself is questionable as there are no details – Adani replied that the auditors may be young but they are more than qualified.
- Adani Group of Companies is heavily leveraged and they pledged their company shares. In short, first, company built on loan and value risen on loan, then again a loan on the shares – this is a debt fuelled growth in which liabilities are more than assets. Present loan is Rs2 lakh crore, of which Rs80,000 crores from Indian banks – fall of Adani Group can also dent banking stocks. Adani said that their profitable businesses are ensuring debt burden is reduced.
The main allegation is of stock price manipulation. Stock price is automatically dependent on demand and supply – when former is more, price is more – and vice versa. What if the supply is physically controlled? Free float in the market is very less, as over 73% is with the promoters that is Adani (maximum permissible is 75%). Remaining 27% – but what if you take away another 15%?
Hindenburg says that this is being controlled indirectly by the family. Big investors like LIC are invested in much of the remaining 10% – for regular traders 3-5% is available. It is possible to manipulate price when supply is controlled. For comparison, Yes Bank has Rs 4 crore share in open market, whereas, Adani has Rs4 lakh only.
This is why, there may not be a total collapse as shares are limited – who will sell – big investors like LIC or promoters? This may work as a damage control – hence can be called a masterstroke! Adani group said the report was bogus and they are planning legal action on Hindenburg, a short-selling company.
But, if we discard the Hindenburg report, or throw their claims into the dustbin – still Adani has to answer key questions – What is the relationship between LIC and Adani? LIC is practically run by Govt., and 98% of investment into Adani from insurance sector is from LIC. LIC has mani-folded their investment in Adani Group – from Rs7,300 crores to 72,000 crores (this is public money).
Whereas, the mutual fund industry largely stays away from Adani Group – then why is LIC firm investing in it? What is the source of their confidence or is there more to it?
The Angle of Conspiracy
If it is so, then, why has Hindenburg not gone after Tata, Birla, Infosys or Wipro? These companies also created wealth for so many, are so old yet no question by Hindenburg – why is everyone after Adani?
How come a single report from a small time research company shatter such a large group as Adani? How can it be a conspiracy against the country? Is India so weak or is something fishy with Adani?
Has nothing changed since 1992 – is stock manipulation still easy? Harshad Mehta Scam 1992, Satyam Scam 2010, and many more! What was SEBI or RBI doing all this time? How can there be loan against the stock – that may be overvalued to begin with? How will banks recover money if it defaults?
And what of the common retail investors? Adani Enterprises is listed on BSE and NSE, in good books of govt., handle huge projects, promoter was 3rd richest a while back – is that not enough to trust the company? If companies as such have managed to deceive everyone then how can retail investors ever trust another company?
SEBI will look into the Hindenburg report, LIC to ask questions – and that’s good because at the end of it the common man has to pay. Our life insurance can be at risk if LIC suffers.
Adani wrote reply, saying Hindenburg cannot understand Indian market – building subsidiaries is common practice here. Market is struggling, and Hindenburg says that Adani’s over-400 pages’ reply lack facts. Adani Group has not clarified relationship with a Chinese national Chang Chung Ling, and also its business relationship with brother Vinod Adani.
No doubt this is the biggest test for Adani Group in a long while and it remains to be seen what happens to Adani stocks. We can hope the Group to accept any mistake and be more transparent. Our country needs 10 Adanis – legal, transparent and non-manipulative. If as a result of Hindenburg report transparency is increased, then that’s welcome – otherwise legal action against Hindenburg should be taken.
02-02-2023
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