The Simplest Explanation of Adani's case

On January 24, 2023, Hindenburg Research, a US-based investment firm and a short-seller, published its report on Adani Group alleging stock price manipulation and insider trading practices. Since the report got published, it has affected the group's image in the market leading to huge financial losses and distrust among institutional investors.

Within just a month of the report publication, Adani Group had lost around Rs. 12 Lakh Crore. The report affected not only investors and the market but politicians, private sector banks, public sector banks, SEBI, and even RBI stepped up into the list.

Because of serious allegations by Hindenburg Research on Adani Group, a massive market drop happened to question the group's integrity, capital market regulatory body - SEBI, and banking regulatory, the RBI.

Hindenburg Research Allegations

• The Adani Group's 7 companies listed in the Indian stock market are overvalued by about 85% to their Price to Earning or P/E ratio and Price to Sales ratio.

• The Group's listed companies have a larger debt to their equity and cash reserves, making them highly leveraged.

• The Group's 5 companies have current ratios of less than 1, making them risky and unable to meet short-term liabilities.

• Adani Enterprises, Adani Transmissions, Adani Powers, and others were reported to follow a suspicious trading pattern due to offshore and stock parking entities.

• The report consisted of 88 questions saying that the conglomerate practiced Stock price manipulation and Insider trading for decades leading to higher stock prices and wealth.

Response from Adani Group

• Adani Group rejected all the research and 88 questions posted by Hindenburg Research and responded with a 413-page report that included various data points, entries, and documents maintained by following Indian Laws.

• The group presented all the disclosures needed by the regulatory authorities and provided all the clarification required.

After reading the response, Hindenburg responded that Adani could only answer 26 out of all 88 questions, but Adani said that the report was "baseless" and a "malicious combination of selective misinformation."

What changed in the market?

Stock market decisions are based on the investors' sentiments, and they would not like risky investments. Hindenburg's report changed the perspective of the market and major investors of Adani companies.

The investors like public sector banks holding about 30% of Adani's total debt, private lending institutions holding approximately 10%, and other investment companies with a stake in the company have suffered significantly. For example, LIC has been the major investor. Out of all the firm's Asset Under Management (AUM), i.e., $508 billion, it invested $2 billion, which had a negative effect due to the report.

The credibility of the report?

• The Hindenburg report came when Adani Group decided to launch Rs. 20,000 crores ($2.5 billion) of Follow-On-Public or FPO offer, which saw a 112% increase. Still, later the company canceled it to return the money to the investors.

• Hindenburg says that its team has led a 2-years of investigation and found that Adani companies have been manipulating stocks and doing account fraud for a decade.

• The report says that within the past 3 years, the group has gained an average of 819% stock appreciation. The accuser says it has visited many sites in almost a dozen countries, which led to the conclusion that the group's 7 companies have sky-high valuations.

• Hindenburg's team also reached out to the former executives and took their opinions where one former executive described the group as a "Family business."

• According to the report, the group has had offshore accounts that generated fraud import/export documentation and faked illegitimate turnovers.

• The report goes back to find the previous allegations on the company, such as the government's fraud investigations for money laundering, theft of taxpayer funds, corruption, etc.

• Rajesh Adani, brother of Gautam Adani, was also alleged in forgery and tax fraud before in diamond trading. Samir Vora, the brother-in-law, was also accused of fraud and making false statements to the regulators. The elder brother of Gautam is also mentioned in the report as being elusive.

Overall, the report combined information about the company's history, statements of the previous employees, government charges, and fires at Adani.

What happens now…?

Hindenburg's report has raised many questions about Adani Group and defamed it in the eyes of the investors in the nations and also at the global level. But Adani has strongly denied most of the allegations and taken legal action against the research firm as it cost the conglomerate around $125 billion loss. The group said that the information in the report was false and designed to damage the reputation. Adani has ensured the public or investors give accurate information about the allegations.

On the other hand, Hindenburg has vastly considered the group's history and formed an opinion and knew well that India is emerging as a global superpower. Such a report can damage the country's reputation. The baffling issue here is that Hindenburg is not just a research firm but also a short-seller that stands to profit from Adani's stock price falls.

Looking at such a massive distrust among the institutionalized investors of Adani and the enormous ripple effect on the overall economic situation of the Indian Stock market, the opposition party INC (Indian national congress) and others have demanded an extensive probe to be carried out on the firm, they further added, it should be done either by the supreme court or by a dedicated parliament committee.

As an after-effect, the broker-level margins have risen drastically because everyone is in the race to protect their invested capital which is currently highly unpredictable.

The SEBI - Securities & Exchange Board of India has started to look for any suspicious allegations by the research team on the Adani group. We have to wait till the final reports are declared to the public. The whole matter will unfold in the coming weeks, revealing the truth behind these allegations.