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A Simplified Explainer On the Adani vs Hindenburg Saga

22 Mar 2023

Adani vs Hindenburg Research: The story so far

On January 24, 2023, Hindenburg Research, a U.S.-based corporation involved in investment research, came out with a damning report on the Adani Group. According to Hindenburg, the research report on the Adani Group was compiled after an intense 2-year investigation into the financials, dealings, and actions of the group.

Hindenburg Research alleged that the Indian conglomerate “engaged in a brazen stock manipulation and accounting fraud scheme over the course of decades”. According to Hindenburg, such stock price manipulation was supposedly carried out by using offshore shell companies linked to Adani’s family to buy the shares of the Adani Group to drive up their prices. This revelation managed to send the markets on a spin and led to an unprecedented rout of the stocks of the Adani Group.

In addition to causing a significant drop in almost all the Adani group companies, the report has also managed to draw the attention of regulatory authorities like the capital markets regulator, the Securities and Exchange Board of India (SEBI) and the banking regulator, the Reserve Bank of India (RBI).

The key findings of the Hindenburg Research report

The report on the Adani Group by Hindenburg Research goes very much into detail about the key red flags that the entity noticed upon conducting an extensive investigation into the group. Some of the findings of the report have been summarized below.

  • 7 of the Adani Group’s companies listed on the Indian stock exchanges are considerably overvalued by more than 85% in terms of the Price to Earnings (P/E) ratio and the Price to Sales ratio.
  • Many of the Adani Group’s listed entities are extremely leveraged, meaning that they have taken on significant levels of debt relative to their equity and cash reserves.
  • 5 of the companies in the Adani Group have current ratios of less than 1, which puts them at substantial risk of not being able to meet their short-term liabilities. 
  • Multiple suspicious trading patterns were witnessed in many Adani Group companies, which include Adani Enterprises, Adani Transmission, and Adani Power, among others, where more than 33% of the total delivery volume (shares purchased) were by suspicious off-shore and stock parking entities.

In addition to these key findings, the Hindenburg Research report goes into more detail regarding the stock manipulation activities, and the corporate maze constructed by the Adani Group to enable them to move money into and out of its companies. Also, at the end of the report, Hindenburg posed a set of 88 questions for the Adani Group challenging them to provide clarifications.

How has the Adani Group responded?

In response to the investigative report by Hindenburg, the Adani Group swiftly responded by issuing a 413-page report. The Adani Group vehemently rejected all of the findings and the 88 questions posed by Hindenburg and stated that none of them were “based on independent or journalistic fact-finding”.

Additionally, the 413-page response from Adani Group contained multiple data points and documents and reiterated that all the entities of the group have abided by the Indian laws and made all the necessary disclosures required by the regulatory authorities.

On reading through the response posted by the Adani Group, Hindenburg Research hit back stating that only about 26 out of the 88 questions posed by them were addressed and many of them were ignored. Also, Hindenburg had openly admitted that it holds short positions in various companies belonging to the Adani group. These positions are held in different instruments including non-Indian-traded derivative instruments and US-traded bonds. Interestingly, such instruments are out of the purview of the Indian regulatory authorities.

Impact of the report on the Adani Enterprises FPO

One of the major repercussions of the Hindenburg Research report was the massive shadow that it cast on the Follow-On Public Offer (FPO) by Adani Enterprises.

Since the report was issued merely days before the FPO of Adani Enterprises went live, many retail investors were wary of investing in it. Furthermore, due to the rout of the share price of Adani Enterprises, which had fallen to around Rs. 2,761 per share, the pricing of the FPO, which was Rs. 3,112 to Rs. 3,276 per share, appeared too high.

However, just when the Adani Enterprises’ Rs. 20,000 crores FPO seemed like it would fall through, it was reported that the entire issue was oversubscribed. Although a majority of retail investors stayed away from subscribing to the company’s FPO, institutional investors, and other domestic entities stepped in to subscribe to the issue.

That said, in a dramatic turnaround, Adani Enterprises stated that it had called off the FPO and that it would return all the proceeds to the investors in a few days. The company stated that the investors’ interests are paramount and that it would not be morally correct to put them through financial losses due to the rout in the Adani Enterprises’ stock.

Impact of the report on the key investors in Adani companies

Hindenburg Research’s report did not just leave a negative impact on the Adani Group but also affected many of its key institutional investors.

One of the largest institutional investors in the Adani Group is the Life Insurance Corporation of India (LIC). The state-run insurance giant is known to invest the premiums that it collects in various stocks. Currently, the total exposure of LIC in the Adani Group comes up to about 1% of its entire Assets Under Management (AUM), which is $508 billion. And the bloodbath that the Adani stocks witnessed has managed to erode more than $2 billion of LIC’s wealth.

In addition to LIC, several of India’s public sector banks also have massive levels of exposure in the Adani Group. According to CLSA, a Hong Kong-based investment group, around 30% of the Adani Group’s total debt is currently held by Indian public sector banks, with private lending institutions only holding about 10%. It is estimated that the total value of money lent by public sector banking institutions to five of Adani Group’s companies, namely Adani Enterprises, Adani Power, Adani Ports, Adani Transmission and Adani Green Energy, far exceeds $9.9 billion. Such high levels of exposure have sent banking stocks into a whirlwind as well, leading to the Reserve Bank of India asking banking institutions to provide details of their exposure to Adani entities.

Furthermore, the MSCI Indian Standard index, which is an index designed to monitor the performance of mid-cap and large-cap Indian entities, was also impacted. Eight entities and associated companies in the Adani group account for a cumulative weight of 5.75% on the index. This prompted MSCI to invite feedback and suggestions from various market participants on the stocks of Adani group companies.

What happens now?

The blowback from the damaging revelations contained in the Hindenburg Research report has undoubtedly sent ripples through the entire Indian financial and political system and has even cast aspersions on the integrity of the country’s regulatory authorities.

The principal opposition party, the Indian National Congress (INC), along with other opposition parties has demanded an extensive probe to be conducted on the Adani Group and their activities by the Supreme Court or by constituting a Joint Parliament Committee.

Meanwhile, almost all Indian stockbroking entities, in a bid to protect their interests, have raised broker-level margins required to trade in Adani stocks. This is in addition to the massive increase in the exchange-level margins due to the unprecedented and consistent fall in the stock prices of Adani Group companies.

With the Securities and Exchange Board of India beginning to check for unusual and suspicious trades in Adani Group entities, it remains to be seen just how the matter will be further investigated in the coming weeks.

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