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Investors in Adani Group companies lost a whopping 85,000 crore in wealth after US activist investor Hindenburg Research released a lengthy report that alleged fraud by the Ahmedabad-based group.

As the news of the report spread on Twitter and WhatsApp groups and television channels, the shares of Adani Group firms began to plummet, leaving the group scrambling for damage control as it furiously denied the allegations as “baseless and discredited".

Graphic: Mint
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Graphic: Mint

Market sentiments were downcast on Wednesday, but while the BSE 30-share index fell by 1.27%, the nine Adani group companies’ market capitalization collectively lost by a wider 4.5%.

Later in a YouTube video, with the national tricolour in the background, the Adani Group’s chief financial officer, Jugeshinder Singh, responded with his trademark aggressive mien: “We are shocked that Hindenburg Research has published a report on 24 January without making any attempt to contact us or verify the factual matrix," Singh said. “The report is a malicious combination of selective misinformation and stale, baseless and discredited allegations that have been tested and rejected by India’s highest courts," he riposted.

So far, Hindenburg’s most prominent short attack was the one that targeted Nikola, in which it accused the electric-vehicle maker of “an ocean of lies." Nikola, which at one point had a $34 billion market value, is now worth $1.3 billion, and a US jury convicted founder Trevor Milton of defrauding investors in October.

Hindenburg first researches a target firm, betting its stock will fall, and then promotes its findings publicly through social media. The group positions itself as a watchdog safeguarding investors from corporate misconduct, while the targeted firms typically accuse it of manipulating the market. Adani’s Singh also questioned the timing of the report, as it coincided with the flagship firm Adani Enterprises’ follow-on public offer (FPO). Shares of Adani Enterprises recouped a part of its intra-day losses to end at 3,389.85, shedding 1.54% from its Tuesday close.

A spokesperson for the Adani group did not answer the questions raised by the Hindenburg report but shared a statement from Singh.

“The timing of the report’s publication clearly betrays a brazen, mala fide intention to undermine the Adani Group’s reputation with the principal objective of damaging the upcoming follow-on public offering from Adani Enterprises, the biggest FPO ever in India. The investor community has always reposed faith in Adani Group on the basis of detailed analysis and reports prepared by financial experts and leading national and international credit rating agencies. Our informed and knowledgeable investors are not influenced by one-sided, motivated and unsubstantiated reports with vested interests," Singh said.

Hindenburg claimed its 129-page document is a two-year effort and its investigations led them to several countries, including the tax haven of Mauritius.

The shares of Adani Group firms with reasonable public float—shares in the hands of public investors—such as Adani Transmission, Ambuja Cements, ACC and Adani Ports, shed the most value.

Shares of all the nine Gautam Adani-owned firms fell, with Adani Transmission reporting the steepest decline, plunging 8.87%, while the two cement twins, Ambuja Cements Ltd and ACC Ltd, lost 7.71% and 7.26%, respectively, on BSE.

Adani Enterprises regained lost ground after reports suggested that the anchor book for the FPO was oversubscribed. The company, an incubator for the group’s fledgling businesses, lost 1.54% to 3,389.85 apiece.

On Wednesday morning, New York-based Hindenburg said it was putting out a detailed report on the group after having worked for close to two years and meeting executives and former Adani staff across six countries. Interestingly, the report came on a day when its flagship Adani Enterprises was finalizing anchor investors for what is billed as the largest private sector follow-on offer to raise 20,000 crore.

This is the second time the group has found itself in the firing line in six months. In September, CreditSights, a research arm of rating agency Fitch, red-flagged what it said were problems with how some of the group companies classified its debt.

Researchers from Hindenburg also pointed out the complicated maze of transactions undertaken by many of the listed Adani Group firms. They highlighted alleged shell firms founded in tax havens, including the UAE and Mauritius, which have been used to give loans to some listed and private companies, often without making the requisite disclosures.

“Even if you ignore the findings of our investigation and take the financials of Adani Group at face value, its seven key listed companies have 85% downside purely on a fundamental basis owing to sky-high valuations," Hindenburg said in the report.

The report said the investment group took a short position in Adani’s companies through US-traded bonds and non-Indian-traded derivative instruments. A Reuters report later in the day said the US dollar-denominated bonds issued by Adani Green Energy dropped nearly 15 cents to under 80 cents on the dollar, while international bonds issued by Adani Ports And Special Economic Zone, Adani Transmission and Adani Electricity Mumbai saw similar declines.

“Today we reveal the findings of our two-year investigation, presenting evidence that the 17.8 trillion ($218 billion) conglomerate Adani Group has engaged in a brazen stock manipulation and accounting fraud scheme over the course of decades," Hindenburg said in its report.

“Gautam Adani, founder and chairman of Adani Group, has amassed a net worth of roughly $120 billion, adding over $100 billion in the past three years largely through stock price appreciation in the group’s seven key listed companies, which have spiked an average of 819% in that period."

“Key listed Adani companies have also taken on substantial debt, including pledging shares of their inflated stock for loans, putting the entire group on precarious financial footing. Five of seven key listed companies have reported ‘current ratios’ below 1, indicating near-term liquidity pressure."

Hindenburg is relatively new in the world of finance: Founded in 2017 by Nathan Anderson, an accountant, it focuses on publishing reports about publicly traded companies. Some of the other successful calls made by Hindenburg in the past include sports betting firm DraftKings and Lordstown Motors. Hindenburg also acts like short sellers on some of the reports it puts out.

Short sellers like Hindenburg bet against companies by borrowing their stock, expecting them to fall. If the stock indeed falls, the short seller buys the now-cheaper shares back, returns them to the broker and pockets the profit.

Hindenburg does expect Adani shares to fall. However, it took a short position in some of Adani’s companies not through the shares directly but through US-traded bonds and non-Indian-traded derivative instruments.

An independent auditor for Adani Enterprises and Adani Total Gas, Shah Dhandharia, is cited in the Hindenburg report, which alleges that the auditors who signed off were too young to fathom the enormity of the two companies’ financials.

“Adani Enterprises alone has 156 subsidiaries and many more joint ventures and affiliates, for example. Further, Adani’s seven key listed entities collectively have 578 subsidiaries and have engaged in a total of 6,025 separate related-party transactions in fiscal year 2022 alone, per BSE disclosures." But the audit partners at Shah Dhandharia who signed off on the annual audits of the two flagships were as young as 24 and 23 years old when they began approving the audits," Hindenburg claimed. “They were essentially fresh out of school, hardly in a position to scrutinize and hold to account the financials of some of the largest companies in the country, run by one of its most powerful individuals," the report added.

Hindenburg has asked 88 questions to the Adanis. “We view sunlight as the best remedy and hope this report helps illuminate these issues. Further to that goal, we hope Adani addresses the 88 questions we have included in conclusion to this report." However, they didn’t wait for the response and went ahead and published the extensive report.

The report also cited the several shell companies registered in tax havens that are allegedly connected with Gautam Adani’s elder brother Vinod Adani.

The report documents how Vinod Adani, along with other close associates, “have set up dozens of entities in Mauritius that have little to no genuine corporate presence."

“We also found other entities in Cyprus, the UAE, Singapore and the Caribbean associated with Vinod Adani, comprising a vast empire of shells. Many of these entities later appear in suspect transactions, often funnelling assets into or out of the Adani Group companies," the report added.

The report also talks about the precious metals and diamond trading that had involvement within the family.

The report says a large portion of the “public" shareholders of listed Adani companies are funds based in the opaque jurisdiction of Mauritius.

Another allegation, but less serious in nature, made in the report is that the family has managed the Adani Group since its formation. Beyond Gautam Adani, the Adani Group’s 22-person leadership team features at least eight members of the family.

The Adani Group on Wednesday reacted indignantly to the charges, saying no one reached out to them. Typically, when such reports surface and result in market gyrations, the regulators, in this case, the stock exchanges, will ask the Adani companies to respond to the slew of charges.

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