A significant fraction of the world’s population is familiar with the Adani Enterprises Ltd. (AEL) and Hindenburg Research Saga, however, may be unaware of the details with respect to it. Thus, I will attempt to summarise the issue in simplified terms.
On 12 January 2023, the AEL published its Red Herring Prospectus (RHP) for its Follow-on Public Offer (FPO) of ₹20,000 crore. Investors were eager about investing in the FPO of AEL, given that it was amongst ‘India’s top business house’ (source: CRISIL). AEL carries an integrated energy and infrastructure platform in India, and a long track record of successfully executing large-scale projects. It is focused on incubating businesses in four core industry sectors — energy and utility, transport and logistics, consumer, and primary industry. The primary purpose of the FPO was to utilise the money raised from the FPO towards the operations in the first sectors AEL operates in, i.e., the energy and utility sector and the transport and logistics sector. The companies operating in the former required funding of capital expenditure for the creation of its green hydrogen ecosystem, and the companies in the latter needed it for improvement of its existing airport facilities and the construction of greenfield expressway.
The FPO opened on 27 January 2023 and closed on 31 January 2023. The FPO was expected to be fully subscribed, allowed AEL to attain objects of its offer. However, on 24 January 2023, Hindenburg Research came out with its report on AEL, titled, ‘Adani Group: How The World’s 3rd Richest Man Is Pulling The Largest Con In Corporate History’.
The report focuses on its 2-year investigation to provide to evidence of the wrongdoing of ₹17.8 trillion ($218 billion) through the following:
- “Brazen” stock overvaluation
- Accounting fraud
- Substantial debt
AEL’s seven key listed companies, have spiked an average of 819% in the last three years. Hindenburg Research expresses its doubt over the high valuation, with Gautam Adani’s (founder and chairman of the Adani Group) net worth rising to $120 billion — $100 billion in this period of three years — given its fundamental analysis of the companies. With its analysis of the financial statements of the Adani Group, Hindenburg Research expresses doubt over the valuation of the companies due to two key reasons — accounting fraud and substantial level of debt.
The report says that 8 of 22 key roles are held by the family members of Gautam Adani; 2 of them have previously been involved in illegitimate business operations, and 1 of them doing so through business’ funds. It specified that 4 major government fraud investigations which have alleged money laundering, theft of taxpayer funds and corruption, totaling an estimated $17 billion. Firstly, Rajesh Adani, Gautam Adani’s younger brother was accused by the Directorate of Revenue Intelligence (DRI) of playing a central role in a diamond trading scam around 2004–05. He was arrested twice over allegations of customs tax evasion, forging import documentations and illegal coal imports. He is currently the Managing Director of the Group. Secondly, Samir Vora, Gautam Adani’s brother-in-law, was accused by the DRI of being in the diamond trading scam as well and of repeatedly making false statements to regulators. He is currently the Executive Director of the important Adani Australia division. Thirdly, Vinod Adani, Gautam Adani’s older brother, is not involved in the operations of the Adani Group, but is a shareholder. He has often been found at the center of the government’s investigations into the Adani Group for the alleged role in managing a network of offshore entities to facilitate fraud. Hindenburg Research identified 38 shell entities in the tax-haven country, Mauritius, that are controlled by Vinod Adani or his close associates. Furthermore, more such entities were identified in other tax-haven countries, Cyprus, the UAE, Singapore, and several Caribbean Islands.
The report points out the high debt level by stating, “key listed Adani companies have also taken on substantial debt, including pledging shares of their inflated stock for loans, putting the entire group on precarious financial footing. 5 of 7 key listed companies have reported ‘current ratios’ (current asset/current liabilities) below 1, indicating near-term liquidity pressure”. Considering the high leverage of the Adani Group, the report raises questions about stability of financial institutions that have given credit to it, with its stock being held as collateral.
AEL’s Response:
The Adani Group rejects the claims made by Hindenburg Research, by emphasising the claims to be equivalent to an attempt to doubt India’s ability to grow and lead the global economy. Jugeshinder Singh, Chief Financial Officer (CFO) of the AEL, labelled the Hinderburg Research as unethical short sellers by turning rumors into facts, “with conflict of interest and intended only to create a false market in securities to enable Hindenburg, an admitted short seller, to book massive financial gain through wrongful means at the cost of countless investors. It is tremendously concerning that the statements of an entity sitting thousands of miles away, with no credibility or ethics has cause a serious unprecedented adverse impact on our investors.”
To address the allegations raised, AEL put forth its answers. Firstly, with respect to the accounting fraud, all allegations like the overvaluation of import and export invoices, intentional failure to pay customs duty, and misuse of tax havens by Gautam Adani’s relatives, AEL specifies that all “are closed and dismissed in (its) favour. Further, these have been disclosed by (it) in the public domain and all (its) stakeholders are aware of the same.” Secondly, regarding its substantial debt level, AEL presents certain metrics to display its improvement with this respect. AEL’s (Net Debt / EBITDA) declined from 7.6x in 2013 to 3.2x in 2022, this is due to its 2x growth in its EBITDA over the last 5 years. Furthermore, to avoid financial crisis, the Adani Group has diversified its source of finance, by reducing its long term debt from Banks from 86% in March 2016, to 33% in March 2022. To justify this, Banks have put forth statements that the share of the total loans given the Adani Group forms less 1% of their total assets. The share of promoter gross pledge position has been reduced significantly to single digits from the highs of around 50% in March 2020, by nearly all its companies.
The reply appears to be inadequate for the investors to be convinced, thereby leading Adani Group to lose its market capitalisation, and Gautam Adani’s valuation. Adani Group stocks fell 5–20%, wiping out ₹3.19 trillion in investor wealth after Hindenburg Research’s report. This appears to be primarily due to it being a highly leveraged firm, with its net leverage (Net Debt / EBIDTA) is 4.91x.
Threat to the Indian Economy:
The prime threat to this Saga lies on a potential decline in one of the sources of finance for Indian companies. The Hindenburg Research’s Report has been critical of the state of Indian capital markets. It states, “India is home to many of the world’s most brilliant entrepreneurs, engineers, and technologists and is emerging as a global superpower. However, the country’s economy has been held back by the broken state of its capital markets.” Foreign investors are likely to develop doubt over other Indian companies due to the elongated doubt over the Adani Group. Foreign Institutional Investor (FII) ownership in National Stock Exchange-listed companies — by market capitalisation — has risen from 10% in 2001 to 18.4% in June 2022.
The questions and allegations raised by Hindenburg Research have led to unfavourable market reaction, leading the Adani Group to understand the fragility of investors’ trust in the group. It will, however, be unfortunate if these questions and allegations cause adverse effects on India’s capital market. Therefore, to strengthen the trust of investors, the Government of India agreed to Supreme Court’s suggestion to set up a retired judge-led committee to study the recent alarming fall of Adani Group’s market valuation. Moreover, Securities Exchange Board of India (SEBI) informed the Supreme Court that it is investigating the allegations of Hindenburg Research against the Adani Group.
