So, what did really happen with the Adani Corporation and the Hindenburg report?
So, what did really happen with the Adani Corporation and the Hindenburg report?
The news of alleged fraud by the Adani business empire rocked the world when Hindenburg Research Corporation published a report on the 24th of January.
Since then it’s been on the news pretty much every day! So, what did really happen?
What’s the clamour all about? What’d the Hindenburg report say about the Adani corporation? And why are the news channels obsessing over it? Above all, why did the business lose over $145 billion in market capitalisation?
Here’s the story for you in super simple language.
Hindenburg Research Corporation. Who are they?
They are basically a financial research firm that specialises in short selling.
Short selling is a stock market tactic in which you can make money when the stock market dips or crashes! It’s a perfectly legal and legitimate mechanism that several smart investors employ to make bets on the market’s downturn!
Watch this movie The Big Short. It’s about how a few people shorted stocks to make great profits in the US stock market crash of 2008.
The background
In 2008 Gautam Adani, the chairman of the Adani group appeared on the Forbes list of billionaires. He was worth $9.3 billion.
However, in the last decade, his worth grew almost 15-fold. He got himself elevated among the top 5 richest people in the world!
If you can grow that big so fast, obviously you’re going to attract media attention and suspicion. And this is what happened.
Nevertheless, this was a positive outcome for the firm because the brand name Adani gained great trust and admiration. This helped the group to raise huge funds by selling bonds, the world over.
Next, the group listed 7 of its group companies in the Indian stock market and raised billions of dollars. The Adani brand name helped build investor confidence. This in turn drove the share prices up and greatly raised the worth of the group.
Now the group was bagging several colossal infrastructure projects from the Indian government like airport and seaport construction, and mining. To execute these projects, they needed money and selling shares alone wasn’t enough to fund them.
So they turned to bank loans. Here, the enterprise did something relatively new. It pledged its shares as collateral for loans. This can be a smart move for the borrower especially when their shares are highly priced and in great demand. But the danger is, if the share price tumbles down, the bank loses its collateral!
Even so, banks kept making loans to Adani enterprises and its group companies based on various factors. One of them was the fact that the firm was actually repaying the loans.
The group took loans under one of its firms and diverted the funds to another firm that needed cash or had the potential to grow. The net effect of all this was that the entire group grew at a blistering pace, winning big contracts, expanding into various sectors and also acquiring other companies.
The market presence of the Adani group rose and in merely 3 years since 2019 Gautam Adani’s worth shot up to over $120 billion!
In comes Hindenburg
The Hindenburg Corporation makes money when the stock market crashes. They were watching the lightning-fast climb of the Adani corporation.
They wanted to see if there was anything suspicious in the Adani group’s dealings so that they could publish the data and try to bring the market down. Thus, they did a secretive investigation on the company and released their findings in which they made the following accusations.
- Stock manipulation
The Hindenburg report claimed that the meteoric surge in Adani stock prices wasn’t due to the Adani brand. It was rather done artificially by the Adani corporation itself.
The allegation was that Gautam Adani created dummy companies in places like Mauritius, UAE and the Caribbean Islands. Then he used these companies to buy his stock himself!
As the demand for a company’s shares increases, the price of the share will naturally increase. Hence, by buying his stock himself the report stated that Adani Group inflated its own stock prices.
According, to Indian regulations, a listed company cannot hold more than 75% of its own stock. However, if the report is true, the Adani corporation would hold even up to 80% of its own shares!
2. Shady people
The report gave a huge list of people under the employ of Gautam Adani with questionable backgrounds.
Several of them including his brother and brother-in-law were accused of scams, bribery and other illegal activities. But they held high positions in the Adani group of companies!
3. Top-level resignations
The report cited that in recent years, the Adani group saw some of its top-level executives especially CFOs resign from the company.
This could imply that there was a high level of compromise in the group’s activities that forced these people to resign.
4. Auditing firm
Hindenburg asserted that the firm that was auditing the Adani group to ensure compliance with statutory norms was way too small to audit the mammoth organisation.
The firm had only 4 partners and 11 employees and a lot of them were only in their 20s connoting that the auditing firm itself could be under the control of the Adani corporation!
Adani group’s response
Stock manipulation
The group simply denied using shell companies to inflate its stock prices. It referred to the fact that stocks that were bought by shell companies were beyond the group’s purview because no one can control who can buy or sell in the stock market.
Shady people
The group called to notice that the accused people were all declared innocent by courts and weren’t convicts. Hence there is nothing wrong with the people in the workforce.
Top-level resignations
To this accusation, the company declared that most of the people who resigned from their roles actually went on to take up higher positions inside the group itself. A couple of others have started their own firms. The company even made mentions of the names of some of these people.
The group said that none of them resigned due to any grievance against any of the group’s companies and it’s been making this information known to the public from time to time.
Auditing firm
The group responded by saying that all the auditors, though some being young, were all qualified and certified by the relevant authorities and there is no concern about this.
The group also was enraged that the identities of these auditors were disclosed thereby violating their privacy, jeopardising their reputation and possibly their careers.
What’s been happening since then
Hindenburg did make a sizeable profit. But not much because the Indian stock market did not fall as much as it expected. Plus, the research corporation didn’t have any holdings in Adani stock. So Hindenburg couldn’t have made much profit anyway.
Gautam Adani’s worth plunged downwards losing $145 billion in a matter of weeks.
The group decided to take Hindenburg Research Corporation to court for concocting lies and maligning the company’s reputation.
It’s also taken several other measures like repaying its loans, delaying some of its projects, withdrawing plans to acquire other businesses and halting its next round of stock sales.
Meanwhile, an American company called GQG bought a stake in one of the Adani group’s companies stating that the long-term prospects for the group are still very good.
The story is still unfolding with the government authorities saying they are looking into it. Investigations are happening all around and nothing can be said until the courts deliver the final word on the subject.
So there you go. This is what happened with the recent Adani group Hindenburg episode. Go check out our other blogs for finance explained in super simple language.