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Adani conglomerate plans independent audit of group companies
The independent audit will be commissioned after the completion of the group’s flagship Adani Enterprises Ltd’s ₹20,000 crore follow-on public offering, and based on that, the legal options will be decided, the people said, requesting anonymity.
The Adani Group plans to hire one of the “big six” global accounting firms to evaluate its corporate governance and audit practices following allegations of fraud by US short seller Hindenburg, two people with direct knowledge of the matter said.
The independent audit will be commissioned after the completion of the group’s flagship Adani Enterprises Ltd’s ₹20,000 crore follow-on public offering, and based on that, the legal options will be decided, the people said, requesting anonymity.
“The audit will include eight of the group’s listed firms. The independent audit report will be presented to the board, and basis the findings, the matter be taken to the court if the board of Adani Enterprises decides so,” said one of the two people.
Until Monday’s market closing, Adani Group shareholders have lost close to ₹5.7 trillion in wealth in just three trading sessions after Hindenburg alleged the group of engaging in accounting fraud, manipulating stocks and overleveraging businesses.
The fresh audit is primarily meant to restore the public’s confidence and arrest the fall in Adani group stocks.
Adani Enterprises’ mega share sale has got weak investor response as stocks of Adani Group firms have witnessed a steep 15-40% fall in stock prices, with Adani Enterprises stock trading below the offer price. Adani Group, through the independent audit/review, aims to establish fresh legitimate proof that the group firms are equipped with adequate assets.
This is essentially meant to prove that the allegations made by Hindenburg may be “wrong”, said the first person.
“The scope of the independent audit will cover a review of certain related party transactions, accounting practices and compliance with corporate governance standards at eight listed Adani group companies. The audit/review report could be submitted within the next few days to the board, and then the matter could be taken to the high court,” said the first person.
The independent audit will also attempt to verify whether Hindenburg’s allegations of artificial inflation of revenues and manipulation of balance sheets and Adani Group stocks are correct or misplaced.
Spokespersons from Adani Group and some well-known global audit firms did not wish to comment. “The independent audit report will be submitted to the regulators too. They (the regulators) are aware of this,” said the second person.
“All we need is proof that the business conduct at the Adani group firms has been fair and just, even though Hindenburg has stated its motive that they are short-selling Adani group companies’ shares,” said a person from one of the largest shareholders of Adani Enterprises.
Adani group has raised $16 billion in equity for its portfolio companies over the last three years as a combination of primary, secondary and committed equity from marquee investors such as TotalEnergies, IHC, QIA, Warburg Pincus and so on.
On Sunday, in a rebuttal to Hindenburg’s allegations, Adani Group stated the audit committee of each of the listed companies is composed of independent directors and Adani portfolio companies follow a stated policy of having global “big 6” or regional leaders as statutory auditors.
The firm to conduct an independent audit will review the transactions and dealings at Adani Group’s listed firms, said the two persons.
In response to Hindenburg’s accusations here, Adani Group stated in its latest statement that Hindenburg deliberately ignores Indian legal processes and regulations in their insinuations. “For instance, they have raised several questions around the offer for sale undertaken by Adani Green Energy Ltd in 2019 while maliciously ignoring the fact that in India, the process for OFS is a regulated process implemented through an automated order book matching process on the platform of the stock exchange,” Adani said.
The upcoming independent audit may analyse certain related party transactions and leverage levels of assets by Adani Group firms that have been questioned by Hindenburg. “...we have improved our governance standards to align it with global best practices. We have already constituted a Corporate Responsibility Committee (consisting of 100% independent directors) in all of our portfolio companies... All Adani entities’ boards represent an appropriate balance between executive, non-executive and independent directors to safeguard the interests of stakeholders... The Board ( of AEL and other Adani listed firms) comprises of at least 50% independent directors,” says Adani’s Sunday statement.
Hindenburg has also alleged Adani group companies of artificial inflation of revenues and manipulation of balance sheets.
“Hindenburg has failed to comprehend that in the infrastructure business, especially in a sprawling geography like India, most large corporates operate in a similar fashion because projects are housed in separate SPVs, and these need to be ring-fenced from a lender perspective for limited recourse project finance and in many cases on account of specific regulatory requirements. As an example, transmission projects in India are awarded under tariff-based competitive bidding. 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,” Adani said.
With regards to the alleged unfair pledging of shares as collateral for loans, Adani said raising financing against shares as collateral is a common practice globally, and banks extend loans on the back of a thorough credit analysis of the underlying assets.
Hindenburg’s 24 January report has questioned how the Adani Group has used offshore entities in tax havens like Mauritius and the Caribbean Islands. The independent review audit may address this alleged concern, too, said the first person. Hindenburg’s report said five of seven key listed Adani companies had reported current ratios — a measure of liquid assets minus near-term liabilities — below 1. This, the short-seller said, suggested “a heightened short-term liquidity risk”.
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First Published:30 Jan 2023, 11:48 PM IST
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