Complete Research of Hindenburg on Adani Group; Is this the Beginning of the End of an Era of Adani Group?

On 24^th January, 2023 Hindenburg Research LLC an investment research firm published their research paper “Adani Group: How The World’s 3^rd Richest Man Is Pulling The Largest Con In Corporate History”. The firm has allegations on Adani Group related to accounting frauds, stock manipulations and money laundering. After the firm published its findings Adani groups total loss has surpassed over $100 billion since Jan 24 which also led to call off one of the biggest FPO of India of INR. 20,000 Crore from Adani Enterprises. The 3^rd richest man Gautam Adani as on the published Forbes Richest Man of 2023 with Net Worth $ 133 billion has slipped down to 24^th position as per the Forbes real time billion list as on 17^th Feb 2023 with net worth $ 52.1 billion.

Before understanding the findings of Hindenburg Research LLC on Adani Group, we must understand some brief about Hindenburg Research LLC. The name Hindenburg Research LLC is derived from Hindenburg Airships designed by German airship designer Ludwig Dürr. Hindenburg Airships were the hydrogen filled airships with an internal framework which did not require the pressure of lifting gas to get its shape. This type of airship was originally designed to be lifted by Helium which was slightly heavier but inflammable gas. But after US congress banned its export of Helium to Germany under the Helium Act 1925 to conserve Helium for use in U.S. Navy airships to Germany, the German engineers shifted to highly combustible Hydrogen gas. Sadly on 6^th of May, 1937 Hindenburg airship number LZ 129 bursts into flames while mooring the airship at a Naval Air Station in New Jersey. Out of 97 people on board with 36 passengers and 61 crewman 35 people were dead and those who survived were severely burned. This was totally a man-made disaster which could have been avoided.

Fig: LZ 129 Hindenburg airship into flames

Hindenburg Research official website on why “Hindenburg”? has following answer:

“We view the Hindenburg as the epitome of a totally man-made, totally avoidable disaster. Almost 100 people were loaded onto a balloon filled with the most flammable element in the universe. This was despite dozens of earlier hydrogen-based aircraft meeting with similar fates. Nonetheless, the operators of the Hindenburg forged ahead, adopting the oft-cited Wall Street maxim of “this time is different”.

We look for similar man-made disasters floating around in the market and aim to shed light on them before they lure in more unsuspecting victims.”

Now, a little about Hindenburg Research LLC:

Hindenburg Research LLC is an investment research firm founded by Nathen Anderson in 2017. Before formation of this LLC Nathen Anderson had been a whistle blower against RD legal Capital, LLC (A hedge fund) before Securities and Exchange Commission. RD Legal lost the trail, leading to fine and industry suspension of its founders.

These days Hindenburg Research LLC is well known as short-selling firm. Shot-selling is a trading practice where you borrow certain securities from your broker and square off that security at a later date. In simpler language it can be said as selling the share (which you do not own) at current market price and buying it later to square it off, after certain pre-determined period or square it off before that pre-determined time. This method is profitable when investor anticipates that the price of share is certain to go down. This way traders can gain even in the bear market. Hindenburg Research LLC gives information to its selected investors about the company which it has researched. Those investors or Hindenburg Research LLC itself short sell the shares of the researched company (usually a day before the research is published to the public). The market usually shows tremendous downward response to the report of Hindenburg Research LLC, as the reports are highly practical and based on detailed facts and findings. Some of the famous researches of Hindenburg include Irregular Acquisition and dealing between Liberty Health Science and Aphria, Yangtze River Port and Logistics a $ 2 billion market cap China-based logistics company whose key asset’s didn’t appear to exists, Bloom Energy who had billions of undisclosed off – balance sheet liabilities, HF Foods who had massive undisclosed related party disclosures including $509 million merger, China Resources Utilization showing how it was under severe financial distress and post the report the company’s share price fell more than 90%, WINS Finance whose subsidiary in China was subject to RMB 350 million assets freeze and also, WINS’ parent company which owned 67.7% of its equity had been declared insolvent in China yet the information’s were not published to U.S. Investors. WINS Finance was later delisted from NASDAQ. There are many more research papers where the share prices of Companies have declined tremendously post the publication of the reports.

What are the findings of Hindenburg Research LLC on Adani Group?

The news of Hindenburg Research on Adani Group spread like a wildfire. The firm has spent 2 years investigating the company by speaking to dozens of individuals (including former senior executives of Adani Group), reviewing thousands of documents, conducting diligence and visiting site in almost half a dozen countries. The findings have focused on 7 key listed companies of Adani Group whose value have increased with an average of 819% over the period of 3 years (the same period when Gautam Adani’s net worth increased from $20 billion to 120 billion). Even if you ignore the findings, these 7 key listed companies have sky high valuation if you consider the fundamentals. These key listed companies have taken huge debt pledging their inflated stock for loans. 5 out of the 7 companies have current ratios below 1 indicating liquidity pressure soon.

Adani Group had been under 4 major government investigations which have alleged money laundering, corruption, theft of tax payer’s funds which in total is estimated to be around $17 billion. In the investigation the members of Adani family have been accused of creating off shore shell entities in tax heaven countries like Mauritius, UAE and Caribbean Island by forging the import/export documents to generate fake or illegitimate sales and remit the funds to these tax havens. The report has quoted few past acquisitions on some members of Adani Family on which Hindenburg LLC has raised 88 questions to Adani Group:

The allegations of Hindenburg Research are very detailed with findings and supporting evidences. The allegations of Hindenburg Research can be categorized into 3 broad categories:

• Accounting Irregularities, non-disclosures and financial leverage:
• Stock manipulations
• Money laundering 

Accounting Irregularities, non-disclosures and financial leverage:

• Non-disclosure of Related Party Transactions as required by Accounting Standard 18, Related Party Disclosures of transactions through 38 Mauritius shell entities controlled by Mr. Vinod Adani.

• A contractor named PMC projects had generated $ 784 million over the course of 12 years. This company shared the corporate address and phone number with Adani’s Corporate Office. 2014 DRI investigations called it a “dummy firm” for Adani Group. So, the report has concluded that PMC Projects is an Adani Group private entity used to suck money out of Adani’s public entities with no disclosure of related party requirements.

• Use of the funds though money laundering to window dress it books of accounts (when necessary, strengthen its profit or cash flow to appear more creditworthy or move capital to other parts of Adani Group where Capital is necessary)

• From a solvency perspective, multiple listed entities in the group are highly levered in comparison to company average. 4 companies out of 7 entities have negative free cash flow, indicating that the situation is worsening. 
• According to the report Adani Ports is the only listed entity capable of generating consistent substantial positive cash flow. Concerns of the Adani Group’s leverage (use of debt to fund investments with view that the return will be more than the interest cost on the loan) is alarming. The report has referred to page 69 of Adani Green Energy Offering Circular dated September 2021 where they have themselves said “Members of Adani Group from time to time breached and may in the future breach certain obligations under existing financing arrangements”. As a result of these breaches, lenders could declare an event of default. The company provides no assurance that it would have “sufficient resources to repay these borrowings”. The Adani Group of companies are distinctly and intricately linked and dependent upon one other. So, the report believes that one single serious liquidity event at any entity of Adani could affect the entire Adani Group.

Stock manipulations

• As per SEBI guidelines Listed companies have to maintain at least 25% of the float of non-promoters to mitigate insiders trading and manipulation. 4 of Adani’s listed companies have high promoter ownership which directly hint for stock manipulations and insiders trading.

• Public holdings of Adani Stock show irregularities like a) The shares are held by an off shore entity (usually shell company), b) the beneficial owners are concealed via nominee directors and c) these off shore entities have invested in shares of only in Listed companies of Adani Group. A former trader for “Elara” (an off shore fund with $ 3 billion invested in Adani Share) in his interview has said that it is obvious that Adani controls the shares. He explained that the shares are intentionally structured to conceal the ultimate beneficial owner.

• Leaked emails of CEO of Elara have shown deals with Dharmesh Doshi (a fugitive accountant who worked closely with Ketan Parekh on deals of stock manipulations). The date on emails clarify that the CEO of Elara has worked with Doshi after he evaded arrest and when he was widely known as a fugitive.

• Monterosa Investment Holdings which collectively with 5 independent funds held $4.5 billion in shares of listed Adani Companies. It’s Chairman and CEO who served as director in 3 companies alongside fugitive diamond merchant (whose son is married to Vinod Adani’s daughter). A once-related party entity of Adani invested heavily on one of the Monterosa funds that later allocated the fund to Adani Enterprise and Adani Power. So, the same people are moving money from India to abroad and again bringing back the money through these off-source entities to dilute promoter holdings and to window dress the books are per the requirements.

• Another entity of Cyprus called New Leaina whose 95% of the portfolio was invested in Adani Green Energy Share. New Leaina is operated by Amicrop a service firm, which has worked extensively to help Adani group to develop its off shore network. Amicrop formed 17 off shore shells and entities with Vinod Adani along with 7 Adani Promoter entities and at least 3 Mauritius – based off shore share holders of Adani Stock. Amicrop played vital role in U.S $4.5 billion scandal to siphon off Malaysian taxpayers’ money.  

So, the examples are the suspected Round-Tipping of Cash, which can be understood from the following diagram:

• The report has linked the past relationship between Stock broker Ketan Parek who was banned from market for 14 years for rigging the price of at least 10 stocks, including Adani Exports (renamed to Adani Enterprises). SEBI had investigated the case and declared that 14 Adani Private companies had transferred shares and funds to 11 entities controlled by Ketan Parekh. 7 Adani Private Companies and Promoter entities were also banned from “buying, selling or otherwise dealing in securities” for two years. A trader who knew Ketan Parekh personally has said that “Ketan Parekh never stopped working in India. His brother-in-law lives here. He [Ketan Parekh] has a full set up in London, he has a full set up in Singapore, he has a very good link in Switzerland. He has absolutely full trust, actually, in Mumbai and he is doing what he was doing, still continues in the same fashion and his business has continued. SEBI knows about it. All the politicians know about it, even people and corporations go to him for their businesses and he´s playing his role”
  So the report has suggested that relationship between Adani and Ketan Parekh is has continued while masking through different off shore entities.

• In comparison to industry average, the report suggests more than 85% downside risk purely on fundamentals. The following table conveys better picture:

Money laundering

• Many out of 38 Mauritius shell entities controlled by Vinod Adani and his close associates in Cyprus, UAE, Singapore and Caribbean Island do not have any obvious signs of operations, with no signs of operating address, contact number or permanent employees. But these companies have collectively moved billions of dollars into Indian Adani listed or private companies.

• The undisclosed related party transactions between Growmore with Adani that Siphoned hundreds of millions of dollars from public shareholders. The corporate records show that Chang Chug-Ling (who served as director of Gudami International Pte Ltd, which was identified as part of a government fraud investigation into the Adani Group’s alleged circular trading of gems) and Vinod Adani share the same address in Singapore. Images in the report shows the location of their address to be empty.

• In addition to use of off shore capital to park stock, the reports have shown numerous examples of offshore shells sending money through onshore private Adani companies onto public Adani companies. Simply, using private companies to transfer funds of off shore shells to public Adani Companies. The funds would then be used to window dress the books of accounts or maintaining capital adequacy when required.

Some of the Examples are as follows:

If Adani Group had been involved in these operations for a very long time to build an empire of billions of dollars making him 3^rd richest person of the world, how could no one (government, public, media, authorities, auditors) have notice this empire built on these weak foundations. The report claims that Adani has jailed or silenced critical journalists those who dare to question him using his power to pressurize government and regulators. So, Adani group has been able to operate a large and flagrant fraud in daylight because investors, journalists and even politicians are afraid to speak against Adani.

 The report has indicated few sensitive red flags relating to the businesses of Adani Group.

1. Extensive turnover of CFOs – Adani Enterprises had 5 CFOs in 8 years.
2. The independent auditors who signed the financial statements of Adani Enterprises and Adani Total Gas was a Tiny Firm of 4 partners and the audit partners who signed the financial statements were very young partners at the age of 28 years.
3. Auditor of Adani Power Issued a Qualified Opinion due to “Material Weakness identified in the company’s internal financial controls over financial reporting, relating to valuation of certain assets connected to power plant in Mundra”. The auditor noted that Mundra power plant’s net worth had been completely eroded due to sustained losses. The management valued the investment at $700 million which the auditors found no basis to support the carrying value of assets. The company’s solvency position is at question as its current liability is higher than current assets. It is clear that Adani Power wanted public to see the healthier footing by inflating the value of assets.

In conclusion section the report has asked for answers to 88 questions. Mr Gautam Adani’s had said that he is open to criticism and the research document has asked Mr. Adani to welcome criticism and embrace transparency. The questions include the promotion of Mr. Rajesh Adani and Mr. Samir Vora despite them being arrested twice after accusation by DRI for in diamond import/export scheme, difference in statement to DRI and the information provided in Pre-IPO prospectus of Adani Power related to directorship of Mr. Vinod Adani, Original sources of fund of Mauritius based entities which are key public share holders of Adani Group, Status on the SEBI investigation on Adani group related to foreign fund stock ownership, Relationship between Monterosa, its fund and Adani Family, Has any entities of Vinod Adani any hand in scam of Jatin Metha. The report includes a long list of questions that the report expects answer from Adani Group.

Adani Group has replied to the report with 413 pager response on 29^th January, 2023 where Adani group has replied stating that Hindenburg has presented the matters which are already in the public domain to create false narrative. Hindenburg is either completely ignorant or has deliberately disregarded applicable legal and accounting standards and industry practices. The reply from Adani Group says that the Hindenburg is an unethical short seller and their report is neither “independent” nor “objective” nor “well researched”. The reply to 88 questions mostly hints that the allegations were baseless, Hindenburg had hidden objective to gain huge profits from short selling the U.S traded bonds and non-Indian traded derivative instruments along with non-Indian traded reference securities. As per the reply the Adani Group has complied with all related party disclosure requirements as questioned in Hindenburg’s report. Similarly, Adani group has also replied that who buys the share of company as non-promoter share holder is not in hand of company, so they are in no position to answer why the off shore companies bought the public shares of Adani Groups. 

Mr. Gautam Adani himself has come up to the media and said that the board has decided to withdraw the fully subscribed FPO of INR 20,000 crore. He said it would not have been morally correct to proceed with the FPO under such volatile market. He further confessed that whatever little he has earned was due to the faith and trust of the investor community. He also added that Adani Group will continue to focus on timely execution and delivery of projects. He clarified that there is no problem with the fundamentals of the company, and that they have a healthy Balance sheet with robust assets. The EBITDA level and cash flows of the company have been very strong and they have impeccable track record of fulfilling debt obligations. He said Adani Group will keep on focusing on long term value creation and once the market stabilizes they will focus on their Capital Market Strategies.    

How have Hindenburg Research been benefitted from all this?

In disclaimer section of the report Hindenburg has mentioned that they hold short position in Adani Group through U.S traded bonds and non-Indian traded derivative instruments along with non-Indian traded reference securities.

Foreign institutional investors (FIIs) are expressly prohibited from short selling and are mandatorily required to settle on the basis of deliveries of securities held by them. Hindenburg Research LLC or any FIIs cannot be short seller to any shares of Adani Group. So, they have held short position in Adani Group through U.S traded bonds and non-Indian traded derivative instruments. These are the derivatives of Indian Companies which can be traded overseas. Companies issues these derivates to raise funds from overseas investors because of their lower interest rate. Depending upon the market conditions the value of these derivatives keeps on changing and it has been estimated that Hindenburg Research has gained hansom return from these derivatives.

In short Hindenburg Research has raised serious allegations to Adani group on manipulating the prices of its shares using off shore shell companies operating in tax heaven countries. As per allegation Adani Group has pledged these inflated shares and has taken massive loans, jeopardizing its liquidity position. The report suggests that one single serious liquidity event at any entity of Adani could affect the entire Adani Group. The report has also said that “Adani Group has been able to operate a large, flagrant, fraud in broad daylight in large part because investors, journalists, citizens and even politicians have been afraid to speak out for fear of reprisal”. But Adani Group along with Mr. Gautam Adani himself have replied that the allegations are baseless and the fundamentals of the Adani Group companies is very strong. What will be new capital market strategy of Adani Group and how the government agencies and SEBI are going to react is yet to see. The market has already reacted with consistent decline in prices of Adani Group of Companies. If the fundamentals are right the market will surely stabilize and if the allegations of Hindenburg Research are true, we might be witnessing the beginning of the end of an era of Adani Group.              

-CA Bishal Ghimire