First stuff first. This is an attempt to summarize two documents that span over 50,000 words in a sheer 1,700 words. So we will have to omit several key details to preserve brevity. Two, this is a developing story with huge implications for the stock market ecosystem.
So if you are a shareholder on the dike shuffling between “buy/sell” decisions, we craving you to take this story with a pinch of salt. This is a brief summary only intended to offer a brief overview of the current situation. It should not be used as an alternate for the actual documents (Hindenburg’s report and Adani’s response). Please read them in full before composing an opinion.
With that introduction out of the way, let’s get to the essence of the matter.
Table of Contents
Hindenburg is a research company and a short seller also. Short selling is the action of betting against a company’s stock. The theoretical mechanics of short selling is much simple. You borrow a few shares of a company from your friendly neighborhood broker and you sell these shares at the current market price — say Rs.100 in the market.
At some point in the future when the stock price dips (to Rs.80), you buy the company stocks from the open market and return them to the friendly neighborhood broker. The transaction is settled and you make a good profit (of Rs. 20).
But Hindenburg doesn’t just betting against stocks. They also release a very accurate detailed report afterward outlining why they are shorting the stock in the first place. They do this in the hope that others can join in on the bandwagon and furthermore beat the stock down.
In the past, they have called out companies such as Nikola (you can find a Finshots explainer here) and Eros International. In fact, when the founder of Hindenburg published a detailed report against the Bollywood production house, Eros took him to court.
Eventually, though he hired a private investigator and found even muddy details — a payment to the tune of $153 million — from Eros to a business run by the CEO’s in-law. The company’s stock price has fallen down by 90% in the past 5 years. Needless to say, Hindenburg has got considerable success following its now-infamous playbook.
Their recent target is Adani and they released a huge report last week outlining allegations of corporate fraud and stock market manipulation.
Adani meanwhile believes that Hindenburg’s attentions are questionable. They argue that the research is confused and fails to make any substantive allegations against the company. They also note that this is an attack on the Indian development growth story by “vested interests” and soon released their own rebuttal answering Hindenburg’s many pointed questions.
So let’s look at some of the massive allegations.
Gautam Adani vs Hindenburg – Allegation 1:
Hindenburg believes various of Gautam Adani’s associates have had past run-ins with the law and yet serve on the board right now. They give a few examples to confirm their point. Chief among them is an investigation by the Department of Revenue Intelligence (DRI) that suspected Samir Vora, Gautam Adani’s brother-in-law in the diamond trading scam.
Adani dismisses these claims by stating that the order from the DRI was set away by a higher authority (CESTAT) with a review petition being subsequently dismissed by the Supreme Court. They also note that other allegations outlined by Hindenburg have also similarly been dismissed by different adjudicating authorities and courts in India.
Gautam Adani vs Hindenburg – Allegation 2:
Next, Hindenburg alleges that various entities connected to Vinod Adani (Gautam Adani’s brother) have dealt with Adani companies (and shares) without disclosing the true nature of these transactions. For the uninitiated, it is a legitimate requirement for listed companies to outline “related-party transactions.”
So these are heavy allegations. Especially since Hindenburg believes that the
- Vinod Adani trifles with these stocks to artificially inflate their price
- He used offshore entities to move money from private limited companies (whose financials may not always be transparent) to Adani’s publicly listed companies — just to increase their financial health temporarily.
They also note that several Vinod Adani-associated entities have no accessible signs of operations, including no reported employees, no independent addresses or phone numbers, and no meaningful online presence.
So they conclude that these must be shell entities (dummy companies) only endorsed to perpetrate corporate fraud.
Adani’s response is this — “Vinod Adani does not hold any management position in any of Adani listed entities or their subsidiaries and has no specific role in their day-to-day affairs. As such, these questions have no purpose to the entities in the Adani portfolio and we are not in a position to comment on your allegations on the business dealings and transactions of Mr. Vinod Adani.”
In conclusion, Adani squabbles that he is not a related party. And as such, they are under no commitment to list these dealings publicly.
They also further reiterate “that any transactions made by the Adani portfolio companies with any associated party have been duly identified and disclosed as related party transactions in compliance with Indian legitimate.”
Gautam Adani vs Hindenburg – Allegation 3:
Hindenburg flags a specific transaction between Adani group companies and AdiCorp Enterprises — an entity allegedly owned by a friend of the Adani’s. four Adani companies lent $87 million to AdiCorp regardless of AdiCorp having made a measly $97,000 in profits.
This, they believe is highly rare considering the size of the loan. They also go on to note that AdiCorp quickly funneled 98% of those loans to Adani Power — another inexplicable move. And so they conclude that Adicorp was simply used to route funds from different Adani Group companies to publicly listed Adani Power.
Adani’s response can be narrowed to one line — “Adicorp is not a related party and as such, they are under no obligation to divulge the information to their shareholders.” Adani however doesn’t explain why they extended the loan.
Gautam Adani vs Hindenburg – Allegation 4:
Hindenburg also lists other “suspect” contracts and asks the group for clarity. Chief among them include a ~$200 million loan given out by a “silver merchant” to Adani Infra (private company) and a ~$600 million loan given out by a Mauritius-based entity to Adani Infra once again.
Both entities are owned by people either directly or indirectly associated with the Adani group. In its questionnaire, the research company asks Adani Group for the source of funds — with the implicit suggestion being that these entities were used to move money between group companies.
Adani’s response once again notes that these are not related party transactions and as such, they don’t offer simplification on the source of funds.
Gautam Adani vs Hindenburg – Allegation 5:
Hindenburg argues that Adani Group moved money into listed companies and moved them out when convenient, thereby greatly rusting shareholder wealth. One example they quote consists of a payment made by listed Adani companies to private contractor PMC.
The payments add up to $783 million more than a 12-year time span. Hindenburg alleges that the PMC project was simply a dummy company for the Adani group — based on charges framed by the Department of Revenue Intelligence.
Adani meanwhile points to an order by upper adjudicating authorities who note that the two firms are independent entities. The group dismisses the claim particularly based on this order.
Gautam Adani vs Hindenburg – Allegation 6:
Hindenburg also believes that Adani’s convoluted corporate structure is a deliberate design characteristic used to hide their many shady dealings. For instance, Adani’s 7 key market-listed entities collectively have 578 subsidiaries. They also allege that Adani firms in the past have seen a wave of exits — primarily their CFOs (chief financial officers).
Adani Enterprises for example has had 5 CFOs in the past 8 years. And despite the company’s seeming complexity, they’re audited by Shah Dhandharia — a financial entity with only 4 partners and 11 employees. Hindenburg believes that these are clear-cut red flags.
Gautam Adani no doubt denies these allegations. They argue that infrastructure companies are by design complicated due to the very nature of their business. For instance, new infrastructure projects are housed in different companies (SPVs) to protect the group’s downside and to meet specific regulatory requirements.
So if you are dealing with multiple projects over certain years, you are bound to have a whole host of new entities. They also dispute that the CFOs have only resigned to take up newer, bigger roles in other Adani group entities. They also list several illustrations to make their point. Finally, they argue that their accountants are entirely capable of auditing their business while noting that several Adani entities are audited by the big 4 — the likes of EY, PwC, Deloitte, and KPMG.
Gautam Adani vs Hindenburg – Allegation 7:
The research firm then points to a list of funds based in Mauritius that has seemingly invested nearly $8 billion in Adani group companies. Their allegation is simple — These funds almost exclusively hold a large number of shares in listed entities of the Adani Group. They believe this is highly unexpected for funds of this size. Take Elara India Opportunities Fund as an example— According to Hindenburg, they have invested close to $3 billion in Adani group companies, with one of their funds deploying almost 99% of their capital in these entities.
They also allege that some of the directors in these funds are directly connected to Adani group companies. The CEO of one of these funds served as a position of director in 3 companies alongside diamond merchant Jatin Mehta, whose son is married to Vinod Adani’s daughter.
So Hindenburg asks — Are they surely acting independently? And if they are acting at the promoters’ bidding, are they breaching SEBI rules on the amount of shares promoters (and their group) can hold in publicly listed companies? And if not, why are they holding Adani shares almost entirely? And from where did they get the money for all this?
Gautam Adani’s response is curt — They note that these are all independent shareholders and any insinuation suggesting that they may be connected to Adani group promoters is incorrect. And as such, they refuse to qualify these questions with a response arguing that they couldn’t possibly have any details about public shareholders.
Gautam Adani vs Hindenburg – Allegation 8:
Hindenburg also draws attention to Adani’s severe response to people critical of Adani’s operations. They argue that the group has initiated legal action against journalists, against Gautam Adani’s public claim that he welcomes criticism. So they ask — Why do this if you are open to differing opinions?
Gautam Adani’s response is firmed once again. We quote “Being open to introspection or understanding others’ viewpoint does not mean we have given up our legal right to defend ourselves, our businesses, and other employees through proper lawful channels. We have exercised our rights in this things in due compliance with the law and through proper judicial processes in this respect.”
After Gautam Adani’s response, Hindenburg shot back with a different memo, standing by its research. They wrote –
“[Adani Group] has tried to lead the focus away from substantive issues and instead animated a nationalist narrative, claiming our report amounted to a “calculated attack on India.” In short, the Adani Group has attempted to amalgamate its meteoric rise and the wealth of its Chairman, Gautam Adani, with the achievement of India itself.
We disagree., to be clear, we believe India is an energetic and 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 veiled itself in the Indian flag while systematically looting the nation.
We also believe that fraud is a fraud, even when it’s executed by one of the wealthiest individuals in the world. In terms of texture, Adani’s ‘413 page’ response only included about 30 pages focused on issues related to our report. The remainder of the response includes 330 pages of court records, along with 53 pages of high-level financials, general details, and details on irrelevant corporate initiatives, like how it encourages female entrepreneurship and the production of safe vegetables.”
So with that turn, the ball is in Gautam Adani’s court now. How will they respond to allegations? We will just have to wait up and see.