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Much ado about Hindenburg Research

What is going to happen ultimately?

Anyone can prepare a research report with many questions in it out of a close watch on a stock with a high PE ratio and that tapped securities from various markets. Stocks with a high PE ratio are susceptible to a quick fall. Hindenburg’s research report highlighted mostly the risk factors which the Adani group mentioned in its disclosures filed with respective securities watchdogs at the time of security issues.

The report of Hindenburg Research on Adani dated 24th January 2023, which the Adani Group called “Mad offs of Manhattan”, appears as a new style of Investor activism, relatively a new term to Indians. There is no need for extraordinary effort to write such reports against a soft target, especially when the targeted company is running a follow-up equity issue. Such reports cannot be forensic report so long as it does not dwell on facts beyond looking at negatives that appeared as risk factors in the prospectus. Adani enterprise as a company that commanded a huge price-earnings ratio on its equity value could be a softer target. The company management has no hand in the fluctuating PE ratio. The demands for the stock by marketmen based on the public perception of the company’s future growth potential determine the ratio. 

The Hindenburg team looked at only the high PE ratio as a team of activists. One only needs to be cunning and a first-grade crook. Hindenburg is a team of proven crooks who enlisted all risk factors mentioned in regulatory filing disclosures through a prospectus. There are no other sources for picking up information. The other way is to announce a huge reward for sharing details as Hindenburg did for information on how the tether cryptocurrency was pegged to the US dollar. A Chartered Financial Analyst, who is also an alternative investment analyst, knew the facts more closely and was naturally familiar with the nitty-gritty of the disclosures and prospectus. By being more critical one can find more questions to ask and make them an issue of non-disclosures.   

It is easier to spot too many holes in the transactions of large business groups with considerable debt and equity exposure, too many mergers, acquisitions and restructuring, and vastly diversified business footprints. When a company issues debts and equities, its prospectus explains elaborately and mandatorily risk factors. These risk factors, however, never deter professional investors from investing in the company. These risk factors sometimes cover the investigation by the Directorate of Revenue Intelligence (DRI) on suspicious overbilling or under-billing of cross-border trades, if any. Tax-related issues about the inadmissibility of some claims and related appeals at various legal stages are common. Adani, being a business group with four decades of existence, naturally might have seen the ruling period of all parties. Its growth in all periods bears testimony to its overriding capability of survival in all the political tides. 

You can make a report by picking up all the risk factors and leaving them with as many questions as you can. If not sufficient, you can visit securities-listed exchanges to pick up the names of securities holders and ask the company to tell you their identity. Simple. Hindenburg listed out a group of shareholders, who are offshore institutional investors, and asked Adani to reveal their identity; it has to be the exchange that should have found out who they are.

Instead of choosing to answer the allegations of Hindenburg directly, Adani Group cited the substantive prospectus and mandatory disclosures, which carried adequate answers. The 413-page answers were too big for Hindenburg to read and respond to in a matter of hours. It said more than 50 of its 82 questions were unanswered though it could have ascertained the answers from the exhaustive details Adani sent to it. As an admitted short seller in Adani securities the Hindenburg team’s intention was admittedly mala fide as Adani’s 413-page report underlines.  

A short seller with a huge short position in bond and murky derivative markets alleged Adani group of brazen stock manipulation as it found Adani group’s seven listed companies’ stock prices spiked an average of 819 per cent in three years. Some of the allegations are misplaced because many of its investors, after due diligence, did not raise the allegations against “the group’s very top ranks and eight of the 22 key leaders are Adani family members.” The exchange the stocks were listed and regulators did not raise any alarm because there was nothing exceptional in it. That is the nature of the equity market. At the same speed, a stock price rises and falls also.   

Interestingly, Hindenburg also alleged the Indian security watchdog says, “SEBI seems more inclined to protect the perpetrators than punish them.” In India, SEBI does not need Hindenburg lecturing nor its whistle-blow since the watchdog has a strong monitoring system in place. 

Hindenburg Research report alleged, “Gautam Adani’s elder brother Vinod was a group executive…”. Page 41 of the Adani response clarifies that “Vinod Adani does not hold any managerial position in any Adani-listed entities or their subsidiaries and has no role in their day-to-day affairs. As such, these questions have no relevance to the entities in the Adani portfolio and we are not in a position to comment on your allegations about the business dealings and transactions of Mr Vinod Adani.” 

Similarly, Hindenburg found that “stock parking – offshore funds and shells tied to the Adani group surreptitiously own stock in Adani listed companies, seemingly in blatant violation of SEBI Exchange rules. Adani group responded: “We reiterate that any transactions by the Adani portfolio companies with any related party have been duly identified and disclosed as related party transactions in compliance with Indian laws and standards and have been carried out on arm’s length terms.” 

One thing is sure, Hindenburg has exposed its ignorance about infrastructure business in India, “where most large corporate operates projects housed in separate SPVs ring-fencing them from a lender perspective for limited recourse project finance and in many cases on account of specific regulatory requirements.” As an example, the Adani report added: “transmission projects in India are awarded under tariff based competitive bidding, in such bidding the successful bidder has to acquire the SPV which is undertaking the project. Hence, it is a regulatory requirement as part of the Electricity Act, 2003 and the regulations of the Central Electricity Regulatory Commission to execute projects in different SPVs.”  

What is going to happen ultimately? The crooks will win the game of staining the image of a group, which has been in the firing range of politically motivated activists. Hindenburg might have covered its short position. With the Hindenburg slinger, Adani may not have lost the game, but regained its strength by prudently using every opportunity in its favour.


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