Hindenburg is a research company that specializes in short selling, which involves betting against the stock of a company.
Hindenburg is well known for their practice of betting against stocks and then releasing a thorough report explaining why it went short. They hope to attract others to their cause, helping to drive down the stock price.
In a massive report last week, they outlined allegations of corporate fraud and stock market manipulation against Adani.
While Adani believes Hindenburg's motives are questionable, their research is flawed and doesn't make any substantive claims against the company, so they soon released a rebuttal answering Hindenburg's many pointed questions. They also note that this is an attack by vested interests on the Indian growth story.
Let's take a look at some of the major allegations.
Despite previous run-ins with the law, several of Gautam Adani's associates serve on the board. They give a few examples to prove their point. One investigation conducted by the Department of Revenue Intelligence (DRI) implicated Gautam Adani's brother-in-law, Samir Vora, in the diamond trading scam.
According to Adani, the DRI's order was overturned by a higher authority (CESTAT), and the Supreme Court dismissed a review petition in response. Several adjudicating authorities and courts in India have also dismissed other allegations outlined by Hindenburg in the same manner.
Hindenburg alleges that several entities connected to Vinod Adani (Gautam Adani's brother) have dealt with Adani companies (and shares) without disclosing the true nature of these transactions. For those unfamiliar with related-party transactions, they are a legal requirement for listed companies.
So these are grave allegations. Especially since Hindenburg believes that
Vinod Adani dabbled with these stocks to artificially inflate their price.
He used offshore entities to move money from private companies (whose financials may not always be transparent) to Adani’s publicly listed companies — just to boost their financial health temporarily.
Several Vinod Adani-associated entities also lack obvious signs of activity, including no reported employees, no independent addresses or phone numbers, and no meaningful online presence.
Thus, they conclude that these are shell entities (dummy companies) set up solely to commit corporate fraud.
As a response, Adani states, Vinod Adani does not hold a management position in Adani-listed companies or subsidiaries, nor is he involved in any of their day-to-day operations. As such, these questions have no relevance to the entities in the Adani portfolio and we cannot comment on your allegations regarding Mr. Vinod Adani's business dealings and transactions.
Adani claims that because he is not a related party, these dealings are not required to be disclosed.
Further, they reiterate that all transactions with related parties by Adani portfolio companies have been identified and disclosed as related party transactions.
Hindenburg flagged a particular transaction between Adani group companies and AdiCorp Enterprises — believed to belong to an associate of Adani. They find it odd that 4 Adani companies loaned $87 million to AdiCorp, given that the company had made only $97,000 in profits. More questionable was when 98% of these funds were then transferred straight to Adani Power. As such, the media outlet suggests that Adicorp may have been used to channel money from various Adani Group companies over to listed Adani Power.
The answer from Adani can be summarized as follows - Adicorp is not a related party and as such is under no obligation to disclose the details. Adani does not explain why the loan was extended.
Hindenburg has raised serious questions about numerous transactions it has flagged. Chief among the queries are two ~$200 million and ~$600 million loans, both given to Adani Infra, a private company. Interestingly, the lenders were entities that had some connection to the Adani Group, either owned by people formerly associated with them or directly linked. Asking for further information in its questionnaire, Hindenburg has implied that these shops might have been used as channels to move funds in-between group companies.
Adani's response indicates that these are not related party transactions, and as such, they do not provide clarification on the source of funds.
The article argues that Adani Group moved money into listed companies and moved it out whenever convenient, thus greatly, eroding shareholder wealth. According to their analysis, listed Adani companies paid private contractor PMC $783 million over 12 years. According to Hindenburg, PMC was merely a dummy company for the Adani group, based on charges framed by the Department of Revenue Intelligence.
In the meantime, Adani cites an order by higher adjudicating authorities noting that both firms are independent entities. The group dismisses the claim entirely as a result.
Hindenburg urges a closer look at Adani's corporate structure. Adani's 7 listed entities have no less than 578 subsidiaries, some of which saw a succession of CFOs in recent years. For instance, Adani Enterprises had five CFOs in the past eight years. Furthermore, despite its apparent complexities, all are audited by Shah Dhandharia — a firm with only four partners and eleven employees. Hindenburg considers this to be an unmistakable warning sign.
Adani has strongly denied these accusations. The company has pointed out that, due to the nature of their business, infrastructure businesses often have a complex structure - for example, different SPVs are created for each new project to provide safeguards and meet regulatory requirements. This means that many entities can exist within one group for several years. Furthermore, Adani alleges that CFOs have simply left the company to take higher positions in other parts of the organization. They are quick to point out examples that they use to back up their claim and also state that their accounting practices are fully audited by some of the world's biggest audit firms such as EY, PwC, Deloitte, and KPMG.
The research firm is calling attention to a list of funds based in Mauritius, claiming they have invested roughly $8 billion in Adani group companies. They argue that these funds primarily consist of holdings in listed Adani Group entities–making it particularly peculiar for funds of this size. Examples include Elara India Opportunities Fund, which Hindenburg says has committed nearly $3 billion and devoted almost 99% of their capital to these organizations. These same firms assert that some board members are linked to Adani Group affiliates; a noteworthy example is the CEO for one such fund who was a director on 3 companies alongside diamond merchant Jatin Mehta–whose son has married Vinod Adani’s daughter.
Hindenburg asks if they act independently. And if they are acting at the promoters' behest, are they violating SEBI's rules on how many shares promoters (and their group) can hold in public companies? In that case, why do they own almost exclusively Adani shares? And where do they get their money?
Adani's response is curt — they note these are all independent shareholders and any innuendos suggesting that they may be connected to Adani group promoters are inaccurate. In response, they argue that they cannot possibly have any information about public shareholders, so they refuse to qualify these questions with a response.
A harsh response by Adani to critics is also highlighted by Hindenburg. Despite Gautam Adani's public declaration that he welcomes criticism, the group has initiated legal action against journalists, they claim. As a result, they ask, Why do you do this if you're open to differing opinions?
Adanis's response is firm once again. We quote Being open to introspection or understanding other people's points of view does not mean we have given up our right to defend ourselves, our businesses, and other employees. By following the law and following the proper judicial processes in this matter, we have exercised our rights.
In response to Adanis' response, Hindenburg sent another memo, defending its research. They wrote:
The Adani Group has shifted attention away from the key matters, propagating a nationalistic outlook, suggesting that our report was attacking India. This is not the case we are convinced India is an ever-evolving democracy and a rising superpower with immense prospects. However, we think the Adani Group has used its rapid growth and Gautam Adani's considerable wealth to misuse the Indian flag and swindle the country.
We strongly believe that fraud is never acceptable, regardless of the person's wealth. Adani's 413-page response mostly consisted of irrelevant court records and 53 pages of financials and general information, rather than addressing the issues brought up in our report. There was also some mention made of corporate initiatives, such as how it encourages female entrepreneurship and the production of safe vegetables.
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