By M L Satyan
Bengaluru, Feb 1, 2023: The whole world knows that Adani’s growth during the past nine years has been unimaginable. His sudden growth has been a “Mystery.” Now this mystery has been unfolded by Hindenburg Research. In Tamil there is a saying: “Pala naal thirudan, oru naal agapaduvaan” which means “a thief who steals regularly for a long time will be caught one day.”
The report has fired back at Adani Group, saying that the Indian conglomerate has been “systematically looting the nation” despite claiming to act in the country’s best interests. “The Adani Group has attempted to conflate its meteoric rise and the wealth of its chairman, Gautam Adani, with the success of India itself,” Hindenburg said.
The report further says, “To be clear, we believe India is a vibrant democracy and an emerging superpower with an exciting future. We also believe India’s future is being held back by the Adani Group, which has draped itself in the Indian flag while systematically looting the nation. The Indian group had engaged in a brazen stock manipulation and accounting fraud scheme over the course of decades.”
Hindenburg said its report was based on two years of investigation. Since the release of the report, the Adani Group has rejected Hindenburg’s claims. The US-based financial research firm has rebutted the 413 page Adani’s response to its report. Hindenburg continues to say that the Adani Group has not responded to the specifics of the 88 questions that it raised.
Due to the report by the New York firm, Adani Group has lost more than US$50 billion in market value in just two trading sessions and Adani continues to lose over US$20 billion, or about one-fifth of his total fortune. Between January 24 and January 31 there has been a steep decline in Adani Group Shares.
The change in Adani Total Gas is minus 46%; Adani Enterprises is minus14%; Adani Transmission is minus 36%; Adani Green Energy is minus 36%; Adani Ports & SEZ is minus 19%; Adani Power is minus 19%; Ambuja Cements is minus 20%; Adani Wilmar is minus 19%; ACC is minus 15% and NDTV is minus 13%.
“Obviously, this is panic-selling,” J M Financials equity research chief Ashish Chaturmohta told AFP, adding that traders were creating new short-sell positions to protect earlier bullish bets on Adani stocks. Hindenburg Research said in its report that Adani Group had used undisclosed related-party transactions and earnings manipulation to “maintain the appearance of financial health and solvency” of its listed business units.
Adani Group dismissed the report as baseless and that it was the victim of a “maliciously mischievous” reputational attack by Hindenburg. Legal chief Jatin Jalundhwala said Adani was considering legal action against the New York-based research advisory in the US and Indian courts.
Hindenburg responded that Adani had ducked the issues its research had raised and instead resorted to “bluster and threats.” “If Adani is serious, it should also file suit in the US,” the firm said in a statement. “We have a long list of documents we would demand in a legal discovery process.”
The report said a pattern of “government leniency towards the group” stretching back decades had left investors, journalists, citizens and politicians unwilling to challenge the group’s conduct “for fear of reprisal”.
“The signal is that because the Adani brothers are very close to the powers that be today, therefore nobody would challenge them,” said the Economist Arun Kumar. “Those who earlier criticised Adani, those who tried to do some investigation, Adani group launched legal cases against them, so they have scared off a lot of people,” he added.
Adani had a humble beginning. Born to a textile merchant in the western state of Gujarat, Adani spent his early career as a small-time plastics trader who travelled by scooter. His big break came after India began liberalizing its economy in the early 1990s, and he was tasked with developing a deep-water port at Mundra, which now hosts the largest commercial port in the country. From there, his company expanded swiftly into infrastructure, logistics and energy, with coal-related businesses fuelling his rise.
Adani’s net worth has grown rapidly, from $9 billion in 2020 to $127 billion in December 2022, during a broader boom in Indian capital markets. Coal remains at the heart of his empire, and he is the largest private developer of coal power plants and mines in the world, according to Global Energy Monitor. More than 60 percent of his holding company’s revenue was derived from coal-related business, The Washington Post reported in December 2022.
Indian government on at least three occasions revised laws to help his coal businesses, saving him at least $1 billion. Critics such as Adani Watch, an Australian-based non-profit, said Hindenburg allegations, if proved true, “are just another example of what happens when crony capitalism and regime favouritism create a perceived culture of impunity.”
The allegations bring into doubt the integrity of Indian capital markets, said Andy Mukherjee, an Indian economics commentator who writes for Bloomberg Opinion. The case has also raised questions about the amounts that India’s public-sector bank have lent to Adani. Public-sector banks hold about 30 percent of the Adani Group’s debt, according to Hong Kong brokerage CLSA.
Adani considers Hindenburg report as an “attack on India.” We should raise certain questions: Does India mean only Adani? Why should Adani suddenly hide under the carpet of patriotism? Is this not an escapism? How long will corporates like Adani continue to swindle the wealth of the country? When will the corporate corruption end in India? Let us arise, awake, think and act.
Also it is a matter of great concern that a huge chunk (almost everything) of India’s infrastructure has been entrusted by the Government of India into the hands of one entity which is Adani Group. He has so much clout on the government that SBI and LIC (both of which have tax-payer’s money) has been made to invest money in the group. All this would not have been possible with the patronage of the Union Government. Hopefully Hindenburg is based in the US, otherwise the government agencies would by now have raided their house.
Mr M.L. Satyan has written an excellent and a very clinical report. Only one point is missing, that is Adani Group is humongously debt-funded with little promoter’s capital. The Group has been on a diversification spree, expanding an empire centred on ports and coal mining to include airports, data centres and cement as well as green energy. But the biggest worry regarding the Adani Group is that its aggressive growth is hugely debt-funded. Questions are growing over whether the rise is sustainable, with a CreditSights report describing the business as “deeply over-leveraged,” and at risk of a debt trap and default in the worst-case scenario. (Source: Bloomberg (24 August 2022)
For example, Adani Green Energy Ltd’s debt-to-equity ratio of 2,021% was, at one point of time, only behind China’s Datang Huayin Electric Power Co., which had a ratio of 2,452%, among 892 listed companies in Asia, according to data compiled by Bloomberg.
The debt-to-equity ratio (D/E ratio) shows how much debt a company has compared to its assets. It is found by dividing a company’s total debt by total shareholder equity. A higher D/E ratio means the company may have a harder time covering its liabilities. For example: $200,000 in debt / $100,000 in shareholders’ equity = 2 D/E ratio. In percentage terms, a D/E of 2 also equals 200%. This means that for every $1 of the company owned by shareholders, the business owes $2 to creditors.
Therefore, the big questions are (1) How Adani Group is going to fund its humongous debt and (2) Expansion plans / Diversification spree.
Late night on 1st February, through a video call, Gautam Adani announced that Adani Enterprises FPO, though fully subscribed, was being withdrawn forthwith as “it was not morally correct” bearing in mind that Adani shares were currently highly volatile. He however maintained the fundamentals of the Group were very strong.
The immediate fallout of Hindenburg report has been (1) Bloodbath of Adani Group shares in the share market, with 8 of 10 Adani Group shares having opened on a low circuit on 2nd February morning. (2) Citigroup has refused to accept Adani share as collateral for giving margin loans to Adani group (3) Credit Suisse decided to bring Adani group shares under more scrutiny (4) Indian banks decided to reassess their loans to Adani Group fearing failure to service the corporate house’s huge debts (5) SEBI has begun an enquiry into Adani Group, especially it’s spine-chilling market loss (100 billion dollars according to The Business Times) in a very short time (6) Government asking for SEBI report within 48 hours (7) Reserve Bank of India has stepped in and asked banks to come clean on the loans they have given to Adani Group.
In view of huge investment by financial institutes including State Bank of India and Life Insurance Corporation of India (owned by Government of India), let’s hope it is not a repeat of Satyam Computer (which inflated its books) fraud on a larger scale.
The latest information is that Adani had to withdraw his Rs 20,000 Crore FPO from the market. The sad part is how the Modi government has facilitated this alleged fraudster and put national institutions like LIC and SBI at grave financial risk.