Adani-Hindenburg Case
The Adani Group had been in the headlines of every news channel, news article and other source of news regarding a report which was published by a foreign research company known as ‘Hindenburg’. Who is this Hindenburg? What was in the research report? Why were the stocks of Adani Group falling so rapidly? What is the current scenario and future of The Adani Group now? These types of questions might come to your mind when you first start looking into this case. This article aims to address these questions by providing a timeline of events and presenting factual information related to this ongoing saga.
Hindenburg Research LLC is a U.S. investment research firm with a focus on activist short-selling founded by Nathan Anderson in 2017. Named after the 1937 Hindenburg disaster, which they characterize as a human-made avoidable disaster, the firm generates public reports via its website that allege corporate fraud and malfeasance.
Activist short-selling as the nature of Hindenburg research, is an investment strategy through which investors strive to identify (allegedly) overvalued companies in an attempt to profit from future declines in the companies’ stock prices. Once an overvalued stock has been identified, the short-seller borrows securities in the company and sells them at the current market price. The plan is to buy back these securities at a lower price in the future, once the stock price has dropped. The securities are then returned to the lender and the short-seller pockets the price difference between the purchase price and the selling price as a profit.
In January 2023, Hindenburg dropped a bombshell—a 100-page report titled ‘How the World’s 3rd Richest Man Is Pulling the Largest Con in Corporate History.’ The report targeted none other than the Adani Group, raising questions about their practices and alleged corporate misdeeds. As Hindenburg proudly proclaimed their short positions on Adani’s stocks, panic gripped the market, and the company’s stocks began to tumble.
Let’s look at the major and the most controversial allegations that were put up by the Hindenburg and Adani’s response to these allegations:
The first set of allegations were regarding Adani’s high levels of debt and the strategy Adani opted to raise more debt by the process known as ‘pledging of the shares’. So, what is meant by the pledging of shares? Pledging of shares is a type of arrangement in which the promoters of a company use their shares as collateral to fulfil their financial requirements. Pledging of shares is common for companies that have high shares owned by investors. The borrower of pledged shares retains ownership of the assets and continues to earn interest and capital gains on those shares. Pledging of shares is generally the last option for promoters to raise funds; if the promoters are pledging their shares, it means that there are no other options for raising funds.
Hindenburg alleged Adani of having a very high percentage of their shares pledged for raising additional debt. According to Hindenburg, ‘Equity share pledges are an inherently unstable source of lending collateral because if share prices drop, the lender can make a collateral call. If no additional is available, the lender could require a forced liquidation of shares (often perpetuating a self-fulfilling cycle as stock prices move lower and selling continues)’.
In simple terms, if the share value of Adani stocks falls by any reason, banks are forced to sell the shares in the open market to cover up for their loan granted to the Adani for the shares pledged. These high volumes of shares when sold by banks, will lead to the sentiment of investor to turn negative for the Adani which will lead to more further selling and ultimately more decline in the stock price. This is then turned into a vicious cycle of further selling of shares by the banks.
Also, Hindenburg also pointed the current ratio of the Adani Group. Current ratio is financial metric used by analyst to measures a company’s ability to pay short-term obligations or those due within one year. It is calculated by dividing companies’ current assets (assets of a company that can be converted into cash in one year or within a normal operating cycle, for example: stock inventory, accounts receivables, cash at bank and other liquid assets) by current liabilities (liabilities are a company’s short-term financial obligations that are due within one year or within a normal operating cycle, for example: accounts payable, accrued expenses & interest, income taxes, interest payable, rental fees, and other short-term debts). Hindenburg pointed out that 5 out of 7 Adani companies had current ratio of less than 1 which indicated that the company had more current liabilities than current assets which could compromise the company’s ability to pay its short-term obligations. Hindenburg pointed that current ratio of Adani Total Gas & Adani Green Energy were as low as 0.2 & 0.5 respectively.
To counter these allegations, the Adani Group staunchly defended themselves. They claimed that their profit before tax (PBT) had been growing at double the rate of their debt over the past five years. In simple words, if their debt increased by 11% annually, their profits surged by a remarkable 22%.
Also, Adani also said that their pledged promoters’ holdings percentage (pledged shares) have also significantly reduced from last 2 years. This can be seen in the graph attached below.
We can see that the pledged shares have significantly decreased from as high as 58%, 54%, 50% & 13% to as low as 17%, 7%, 3% & 4% respectively.
The next set of allegations put up by Hindenburg is regarding the stock manipulation. So, according to the Minimum Public Shareholding (MPS) rule issued by SEBI, promoters of a public listed company are not allowed to hold more than 75% of the total equity and 25% of the outstanding equity must be compulsorily held by the general public.
Hindenburg alleges Adani to have made several shell companies situated in tax havens such as Mauritius to buy the outstanding shares of the Adani group to increase the promoters holding to more than 75% and purposefully increase the stock prices as majority controlling power and equity lies in the hand of the promoter itself.
We can see these companies (alleged to be shell companies by Hindenburg) situated in Mauritius, holding large amounts of only Adani shares in their portfolio.
We can also see how much more Adani is suspected to have increased their promoters holding over 75%. We can see that Adani transmission has a suspected promoter holding of 85% which is 10% more then the legal limit.
Adani’s response to this allegation was fairly simple and straightforward. They said that they had no relation to the parties mentioned above and have no control over who buys/sells or owns the publicly traded shares or how much volume is traded.
The last major allegation put up by Hindenburg is related to the auditing of the Adani firms. Hindenburg points that the auditors for Adani Enterprises & Adani Gas is a tiny firm called Shah Dhandharia & Co. The firm only has 4 partners & 11 employees. The record also shows that it pays INR 32,000 in monthly office rent. Hindenburg also pointed out that 3 out of the 4 partners of Shah Dhadharia & Co were as young as 23 years old who just finished their university and questioned their ability to audit and scrutinize the accounts of one of the world’s most powerful individual. Hindenburg alleged that, given the complexity of Adani’s listed companies, with hundreds of subsidaries and thousands of interrelated dealings, why did Adani chose this virtually tiny firm instead of larger and more credible auditors?
Adani’s responded to these allegations by stating that the auditors who have been engaged by them had been duly certfied and qualified by the relevant statutory bodies who are responsible to determine these benchmarks & all the auditors have been appointed in compliance with the applicable laws. Adani also stated that the financials and public documents of the Adani portfolio entities clearly discloses Shah Dhandharia & Co as their auditors to all regulatory and stakeholders.
Some other allegations were also put up by the Hindenburg related to the people in the management of the Adani’s firms, alleging to not have clear background check and to be related to various scams and frauds. For which Adani’s response was that they had been disclosing the information about the management and the indviduals had been disposed of the charges and are not related to the mentioned wrongdoings anymore.
The fear and negativity that spread among investors led to a continuous decline in the stocks, hitting lower circuits for several consecutive days. As a result, the Adani Group experienced a loss of as much as 1 lakh crore of their market value. The decline in stock value also affected Gautam Adani’s ranking in the global rich list, causing him to fall from the second position to the twenty-first position.
In response to the situation, the Adani Group had planned a follow-on public offer (FPO) for Adani Enterprises worth ₹20,000 crore. This FPO was fully subscribed, thanks to the support from various family offices. However, on February 2, the group decided to cancel the FPO due to the “unprecedented situation and the current market volatility.”
To address concerns and stabilize the situation, the Adani Group made a few changes to its plans in late February. They suspended work on the ₹34,900 crore Mundra petchem project and canceled the ₹7,017 crore acquisition of DB Power. Adani Green Energy also put its ₹10,000 crore capital expenditure plans under review.
In March, the Supreme Court combined multiple public interest litigations (PILs) related to the Adani-Hindenburg saga into one case. The court brought in the markets regulator SEBI (Securities and Exchange Board of India) and appointed a committee to investigate whether there was any regulatory failure in dealing with the alleged contravention of securities market laws by Adani group companies.
In May, the SC committee’s report stated that it had not found evidence of the Adani group violating existing market regulations. However, SEBI was given an extension to submit its own report on the matter, indicating that further investigation was still ongoing.
This was all about the Adani-Hindenburg saga, as a learners and rational investors, neither we should ignore the red flags Hindenburg raised for the Adani Group nor we should become compeletely against the Adani and their great ambitions for their growth prospects of developing the country. We as retail investors must be aware and diversified across other stocks and assets classes to mitigate any sort of risk caused by faling of any indiviual share.
Frequently Asked Questions
Activist short-selling as the nature of Hindenburg research, is an investment strategy through which investors strive to identify (allegedly) overvalued companies in an attempt to profit from future declines in the companies’ stock prices. Once an overvalued stock has been identified, the short-seller borrows securities in the company and sells them at the current market price. The plan is to buy back these securities at a lower price in the future, once the stock price has dropped. The securities are then returned to the lender and the short-seller pockets the price difference between the purchase price and the selling price as a profit.
Pledging of shares is a type of arrangement in which the promoters of a company use their shares as collateral to fulfil their financial requirements. Pledging of shares is common for companies that have high shares owned by investors. The borrower of pledged shares retains ownership of the assets and continues to earn interests and capital gains on those shares. Pledging of shares is generally the last option for promoters to raise funds; if the promoters are pledging their shares, it means that there are no other options for raising funds.
The current ratio is a financial metric used by analysts to measures a company’s ability to pay short-term obligations or those due within one year. It is calculated by dividing companies’ current assets (assets of a company that can be converted into cash in one year or within a normal operating cycle, for example: stock inventory, accounts receivables, cash at bank and other liquid assets) by current liabilities (liabilities are a company’s short-term financial obligations that are due within one year or within a normal operating cycle, for example: accounts payable, accrued expenses & interest, income taxes, interest payable, rental fees, and other short-term debts).
Shell companies are business entities that are created for the purpose of holding assets, conducting transactions, or engaging in financial activities, but they typically lack significant operations or substance. These companies are often characterized by having minimal employees, limited physical presence, and little to no genuine business activities.
The primary purpose of a shell company is to provide a vehicle for various financial and non-financial activities that require anonymity, secrecy, or the appearance of legitimate business operations. Shell companies can also be used for illicit activities such as tax evasion & money laundering.
Auditing, also referred to as scrutinizing, is a systematic examination and evaluation of financial records, statements, transactions, operations, and other relevant information of an organization to determine their accuracy, reliability, and compliance with applicable laws and regulations.
A follow-on public offer (FPO) is a process through which a publicly traded company issues additional shares of its stock to the public after its initial public offering (IPO). It is a means for a company to raise additional capital from the market by selling newly issued shares.