Opinion:
Summary -The Adani group is being accused of fraud by the American short-selling company Hindenburg. This issue is socially relevant due to the themes involved: globalisation and sovereignty. India’s history of colonialism and sensitivity towards external influences make Adani’s appeal to nationalism understandable. Countries now seek to maintain their sectors’ independence, as seen in the increase of rhetoric on energy independence, securing supply chains, and privacy & security alliances. The truth about the Adani-Hindenburg issue lies somewhere in between.
In its defence, the Adani group claimed the attack on it, was an attack on India. “Fraud Cannot Be Obfuscated By Nationalism” was Hindenburg’s response.
There are a number of interests and factions involved in this matter, and this article highlights some of the perspectives, knowing that the truth lies somewhere in between.
Whats Up-
American short-selling company Hindenburg on 25 January 2023 accused the major Indian Infrastructure group, Adani Group, of being a con. The report released by Hindenburg initiated a fall in Adani stocks as well as the Indian market. Short Sellers make money by borrowing assets when they are still high in value and returning the assets when they are lower in value. They sell and then buy, respectively. When positive, Short-Sellers prevent market bubbles from occurring, and when negative, they destroy good businesses with self-fulfilling prophecies. Shorting is just a transaction order/process; it is neither inherently good nor bad.
National Context
(Globalisation, Rising India, Nationalism as Sovereignty thread)
The Adani-Hindenburg issue is socially relevant because society has become more sophisticated in understanding the key themes involved: globalisation and sovereignty. Governments, businesses and people have grappled with these concepts recently during the Covid-19 Supply Chain disruptions, and the Energy Market disruptions due to the Russia-Ukraine war. This understanding underpins the economic sanctions on Russia. Notably, India has not supported these sanctions; there are costs and benefits to taking this position.
Globalisation has matured to the point of starting to decline, to maintain countries’ sectors’ independence. Countries are now wary of how vulnerable they are to suppliers and other business partners.
Examples of Sovereignty bolstering through targeting industry:
- Energy Independence – Nord Stream Gasline attack
- Privacy and Security – Huawei bans
- Computing – TSMC, Taiwan dispute. Semiconductor expert labour banned from working in China.
- Social Media – Facebook and Google bans in China
At the same time as Globalisation has matured, former colonies have gained more influence, acting more independently than before, granting themselves the right to make their own multilateral relationships. Blocks like BRICS (which India is a part of) purvey philosophies like “A Multi-Polar World.” which by definition seeks more democracy for all states in a hierarchical world.
Adani’s appeal to Nationalism makes sense, given current moods, India’s history of colonialism and that Hindenburg is a Western company. Part of the sensitivity towards external influences comes from seeing such players plan for India to inherit China’s role as the world’s manufacturer. That level of influence is threatening.
Other reasons for India’s defensiveness
- The need for Indian Foreign Affairs Minister Jaishankar to repeatedly defend what he calls sovereign decisions. E.g. That, India, for a while, wasn’t the largest consumer of Russian oil Europe was, but it was encouraged not to buy Russian oil at the same time . Similar values were pointed to by the Shanghai Cooperation Organisation justifying their dealings with Russia.
- Ukraine wants sanctions on India for buying Russian Oil.
- George Soros attacked PM Modi and Adani. Mr Soros is known for short-selling the Pound, leading to a crash in the currency in 1992. Mr Soros has since been accused of other actions against nations’ economies.
Business: Adani Vs Hindenburg
Why Is Adani So Important to India’s Growth Story?
Adani – A Competent Actor
The Indian economy has a GDP in the top 5 or 6 globally, it is expected to continue to do well. Much of its growth will come from an increase in the productivity of its young population. In 2025 their labour force will reach 20% of the world’s whilst they currently only contribute 7% to the world’s GDP. With good regulation and long-term investment, India is expected to be one of the most important markets in the future.
The Adani Group is a collection of Infrastructure companies; they are largely owned and controlled by members of the Adani Family. Adani was founded by Gautam Adani, and even after going public, the Adani Family has maintained control by owning more than 72% of the shares and having family members in management. Adani is active in Energy, Logistics, Mining, Food Manufacturing and other industries. At the start of 2023, collectively, Adani Enterprises was the most valuable business in India.
Adani Group Activity: Source Adani Group
Competence, Political alliances
Respected Financial Analyst Aswath Demodaran noted that Adani is too competent an operator to be called a con. Its efficiencies in operation create value for the whole community. Adani particularly does well in transportation and logistics; thus, as a leader in Energy, Materials & Mining there are lots of synergies available to Adani itself and to its clients.
Infrastructure business tends to have low margins, very high investment costs, and lengthy payback periods. This kind of Capital Investment attracts investors whose interests for the country match those of the government. Adani’s end-to-end logistics and backwards integration include mines, trains & lines, warehouses, and Abbott Port in Australia; and recently, they also acquired 70% of Haifa Port in Israel. Adani has invested heavily in dredging, resulting in one of its ports being able to house the biggest ships and having the fastest turnaround times. Because of all of Adani’s internal coordination, they are able to offer superior service.
Politics
Heavy structural investment is fundamental to the future of a developing economy; in this action, Adani is aligned with the Indian government. The cons of a family-owned-like ownership structure are mitigated by the family also being Indian. Developing economies have not been adequately protected from big multinationals’ monopolistic and anticompetitive behaviour. For example, South Africa and Zimbabwe argue some of their key industries were artificially capped by foreign interests. In certain emerging economies, we have seen businesses take on development roles usually taken by Government, for example, the Chaebols in South Korea. India’s celebrated largest democracy and SEBI (Securities Exchange Board of India), can manage the centralised ownership. Government and businesses thus work together towards their nation’s interest, with the Government leading.
Adani Enterprises is accused of having benefited from Gautam Adani (CEO, founder) and PM Modi’s relationship. The two have an alliance that has seen both rise in politics and in business. Hindenburg’s criticisms of Adani receiving undue favour from Indian regulators and banks, were echoed by the opposition party in parliament, shortly after the Hindenburg report was released. The report argues that the mostly debt-financed Adani Enterprises’ success is dependent on accounting fraud and regulatory negligence or corruption.
Adani Debt Financing
The gist of Hindenburg’s argument is as follows:
Adani Enterprises presents itself as credit-worthy through accounting fraud. Intragroup artificial trading is used to inflate revenues. At the same time, stock manipulation keeps the stock price high; this is carried out through shell companies. Stock manipulation is made easier by Adani Enterprises’ related parties cumulatively owning more than 75% of the stock (SEBI limits related-party ownership to 75%). Large trades significantly affect the stock price, if the free float is much lower than expected (non related party ownership). Adani denied the report’s allegations in a similarly over-large response.
Adani Group companies have had a high level of debt financing as opposed to raising equity in the market. This is a deliberate decision to maintain family control of the group. The concentrated ownership may allow for the complicated intragroup lending Adani engages in. Attaining high revenue growth through high debt levels, for a low-profit margin can be seen as a success; but also as risky. Hindenburg argues Adani is overlevered.
Adani Group uses complicated intragroup lending, giving member companies better terms than they would have individually. They are separate companies but exist together in their notably exclusive self-financing system. The Group uses Brand Name value to drive higher IPOs. New Companies acquire some debt from pledging shares, and established sister companies get better loans to loan to the newer, rapidly growing companies. Established companies buy into newer companies, sell shares later, or get new cashflows. Successfully getting new ventures funded creates good news, that drives stock valuations higher. Higher market value, in turn, would lead to cheaper loans. Finances can be directed to a company in need. This information is and has been public knowledge.
The way Adani Group companies manage debt can be called risky, but it is not illegal and can be seen as worth the growth attained. Low current ratios and a higher cost of debt than profit margin rate are negative metrics. Positively, the profit is growing faster than debt; they are just capable of covering their interest payments (interest coverage ratio = EBIT/ Interest expense), and they have reduced the percentage of shares pledged significantly. Adani Group’s debt risk has gradually been reducing since 2020, with significantly less share pledging and more equity financing. Financial Analyst Aswath judges that the Adani group prefers debt financing so the Adani family can retain control of the group.
Assessing the companies requires understanding their complex self-financing, studying the companies individually, understanding the changing effects of their political ties and considering that it operates like a family business with Adanis in ownership and management. Hedge funds have taken both short and long positions on the stocks.
Doubting the Adani Group
As Hindenburg states, “Fraud Cannot Be Obfuscated By Nationalism”, the national relevance of the Adani Group should not dismiss clearly questionable conduct. The Group, like other businesses, exists primarily to increase shareholder value and can be a shorting target like other businesses.
One of Hindenburg’s main points is the Adani Group is overvalued. On average, the group appreciated 819% in market value over the last three years; the stocks have declined significantly since the report.
The main assertion is that the Group has engaged in stock manipulation through shell companies in Mauritius connected to Vinod Adani (Gautum’s brother). Vinod Adani also has been allegedly associated with the shell companies by Forbes and Bloomberg. These companies hold hundreds of millions of USD worth of Adani stock, as nearly 100% of their holdings. Hindenburg notes the funds’ trading patterns don’t seem to follow what a rational actor would do.
The Adani Group has argued that Vinod is not a related party to the business.
The Adani Group’s defence
Adani responded to Hindenburg’s report with a more than 400-page defence. It noted that Vinod “has no role” in the Adani Group and is an unrelated party. SEBI rules state that related parties (Internal business relationships) cannot own more than 75% of shares. If the shell companies are included, the Adani Group’s ownership would be above the 75% limit. About the Shell companies, Adani noted that it had no influence on what the public chooses to do with their shares, and denied association.
As shell companies are designed to hide owners and transactions, there is no easy way to prove a connection between the shell companies and the Group. In such a situation, the allegation is not legally effective; however, if convincing, it would have an effect on the market, and it did.
In recent weeks many articles have been written, alleging evidence that Vinod was a key negotiator for Adani deals. Writers for Forbes allege a deal between Total and Adani was made through a Shell company owned by Vinod (According to Bloomberg).
There are other allegations of corrupt personnel and incompetent auditors. Adani put shortly simply disagrees with that assessment and states that it is only proper for the legal system and regulators to decide this.
Resolution
The most important reaction will come from SEBI, as it has the legal obligation to regulate securities in India. SEBI has to maintain trust and stability in the market to continue the India growth story as projected. If local regulators handle this matter appropriately, it bolsters the sovereignty argument. Shorting is one of many necessary financial instruments which provide utility; prejudice towards the practice, in general, is inappropriate. Various non-successful solutions have been proposed, to prevent ill-gain from shorting innocent actors. For example, holding short profits until a court, or SEBI, or the SEC can rule over the fact; then giving the money to the moral party.
States, Regulators and Businesses must act more fairly if we are to keep the advantages of globalisation. There must be an allowance for changing competencies, changing relationships, and continuing to seek mutual benefits. India and its company Adani are one of many examples of developing nations gaining more influence in the world. Managing such social change appropriately will lead to peace and prosperity for all. Hopefully, hopefully, the Adani Group is a good example of well-run business gaining influence.
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