Short Selling Shakes Gautam Adani’s Empire

debtPoor ROM In the early 1980s Gautam Adani emerged as India’s richest citizen. Now, in just a few days, the foundations of his vast empire are shaken. On January 24, Hindenburg Research, a small New York investment firm, published the report It calls the Adani Group “the biggest fraud in corporate history.” In a series of statements, the group said the report was “viciously mischievous”, “uninvestigated” and “obstructed” the secondary public offering of its flagship publicly traded company, Adani Enterprises. I replied that I intended to The group also said Hindenburg released the report “without contacting us or verifying a matrix of facts”. We are deeply concerned by the deliberate and reckless attempts by the Company to mislead the investor community and the general public.”

These vehement denials, first shortly after the Hindenburg report was released, and then when markets reopened on January 27 after the holidays, could not avoid Adani’s sale of stakes in seven publicly traded companies. In two trading days, Adani Group’s listed companies’ market capitalization fell by $47 billion, or 22%. Adani’s personal wealth fell to $93 billion from $122 billion at the end of 2022, according to research firm Hurun Reports. The episode also brought the world’s attention to his one of the Indian corporate success stories. It is also a key driver of India’s recent economic growth.

Hindenburg could not have chosen a larger whale to target Adani. After dropping out of school at the age of 16, the entrepreneur went through a series of jobs, first trading diamonds, then metals and grains, before entering his infrastructure business. Today, his company operates some of India’s largest ports, warehouses 30% of its grain, operates one-fifth of the power lines, accommodates one-fourth of the commercial air traffic, We produce probably one-fifth of the cement. A related Singapore joint venture aims to become India’s largest food company. The Adani Group has also invested in strategically located ports in Australia, Israel and Sri Lanka.

In the last financial year, the Group’s total listed company revenue was $25 billion, representing 0.7% of India’s. GDP, and net income of $1.8 billion. Their combined annual capital expenditure is about $5 billion, making him 4% of the total of all non-financial public companies in India. Adani’s plans are even grander. Between 2023 and his 2027, the group is projected to spend more than his $50 billion on investments involving clean energy and hydrogen.

Adani is widely recognized as a master operator with a genius for navigating the complex legal and political landscape of capitalism in India. However, some investors have occasionally expressed concerns about his group’s governance and opaque financials. That is the focus of the Hindenburg report. It describes a complex network of funds and shell companies, some based in Mauritius, interacting with 578 subsidiaries spread across seven listed companies. Hindenburg claims these companies made 6,025 of his related party transactions last year.

Byzantine corporate structures are common in India and other emerging markets. However, the report alleges that the Adani Group is “involved in brazen stock manipulation and fraudulent accounting schemes.” Hindenberg argues that shifting money to the balance sheet “to maintain the appearance of financial health and solvency” among a small number of liquid assets.

As a result, five of the publicly traded companies were overvalued by as much as 85% despite severe liquidity shortages, temporarily filling a financial hole, Hinden said. Berg writes. The group’s “apparent accounting fraud and sketchy dealings” were made possible by “virtually non-existent financial controls.” Hindenburg claimed Adani Enterprises had 156 subsidiaries, but the report was audited and approved by a small accounting firm that employs a handful of people, including one in his early 20s. .

According to Adani Group, such allegations were “verified and dismissed by India’s Supreme Court.” On January 27, the group released his PowerPoint presentation refuting Hindenberg’s claims. Specifically, we noted that the Group’s debt had declined and that operating company debt issuances had been classified as investment grade by various rating agencies. It added that multiple accounting firms were used to provide the audit. Jalundhwala said Hindenburg’s report had caused “undesirable distress to the Indian public” and had a negative impact on the company and its shareholders. “We are evaluating the relevant provisions below. we Indian law on corrective and disciplinary measures against the Hindenburg Institute,” Jalandwala wrote.

Hindenburg responded on Twitter that he supports the report and welcomes potential legal action, particularly in the United States. .

For the time being, this report has overturned Adani Enterprises’ long-awaited secondary offering. This was intended to raise about $2.5 billion of new capital, partly to reduce debt. The first phase of the offering, which accounts for 30% of the funding, took place on his January 25th, raising $735 million and being fully subscribed. Several prominent investors participated in the tender, including the Abu Dhabi Investment Authority, an Indian life insurance company and entities associated with his two US banks, Goldman Sachs and Morgan Stanley. Adani Enterprises’ stock price has since fallen below the offer price. A large portion of the public offering, which was due to start on January 27 and end on January 31, has so far attracted few buyers. ■