Hidenburg vs. Adani: The end of an era?

In its latest report, Hidenburg Research, an investment research firm, alleged the Indian Conglomerate Adani Group of stock manipulation and accounting fraud.

Followed by a 2-year investigation, the firm stated that the 7 key listed entities of Adani Group are:

• Overvalued
• taken on substantial debt, including pledging shares of their inflated stock for loans, putting the entire group on precarious financial footing
• the current ratio of 5 out of 7 key listed entities is below 1, which indicates near-term liquidity pressure
• controlled by the Adani family members, calling it a “family business”
• having accounting issues as Adani Enterprises has had 5 CFOs over the period of 8 years.

The firm also found out that Adani family members allegedly cooperated to create offshore shell entities (are those entities which exists only on papers and doesn’t have any material economic activity) in tax-haven jurisdictions like Mauritius, the UAE, and Caribbean Islands, generating forged import/export documentation in an apparent effort to generate fake or illegitimate turnover and to siphon money from the listed companies.

It also alleged that 4 of the listed Adani group companies are on the verge of being delisted because of high promoter ownership. As per the Regulation 38 of the Listing Regulations, the listed entity shall comply the minimum public shareholding as per the Rule 19(2) & 19A of the Securities Contracts (regulation) rules, 1957.

The provisions of Rule 19A of the Securities Contracts (Regulation) Rules, 1957 reads as under:

•  Every listed company (other than public sector company) shall maintain public shareholding of at least twenty-five per cent.
• Where the public shareholding in a listed company falls below twenty-five per cent at any time, such company shall bring the public shareholding to twenty-five per cent within a maximum period of twelve months from the date of such fall in the manner specified by the Securities and Exchange Board of India.

In response to the allegations, Adani Group:

• addressed it as a “calculated attack” on India, its institutions and growth.
• claimed that “The report is rife with conflict of interest and intended only to create a false market in securities.”
• alleged Hidenburg of malafide intentions of diverting the attention of target audience and managing short trades to benefit at the cost of investors.

As a result of this report, the stock price of all the listed entities of Adani Group has crashed. Consequently, the global ranking of Gautam Adani in the list of billionaires, has slipped from 2nd to 17th.

Looking at the volatility in the market, the holding company of Adani Group, Adani Enterprises called off its FPO worth Rs. 20,000 crore, saying that the company wants to protect its investor community.

Market regulators like SEBI and RBI have started their investigations in this case and closely observing the fall in the stock prices of the group and the lenders’ exposure in the group.

Now the big question is that- Hidenburg, being indulged in short selling of stocks of many conglomerates and making money at the cost of investors, is again doing so looking at the growth prospects of India and its conglomerates or is it really a fraud that Indian regulators have not found yet ?