A New York-based activist investor group has accused the Adani Group of engaging in “brazen stock manipulation” and “accounting fraud scheme” for decades. The report had an immediate effect and Adani’s stock price tanked. Here is a dummy’s guide to understanding the allegations—how exactly did Adani commit this alleged fraud?
Written by: Samarth Bansal
Please note: This is part one of our two-part series on the explosive Hindenburg report.
The mind-numbing numbers
Gautam Adani's net worth in January 2015: approximately $6.5 billion.
It doubles in the next five years to $11 billion. Then it grows 10X in the next three years to $120 billion in January 2023—making him the world's third richest.
That's insane growth. How did this happen?
First, that's mostly 'paper wealth': Adani went from becoming richer and richer to Asia's richest because the market value of things he owned skyrocketed. Those things are the stocks of the Adani group.
The group's seven key listed companies—meaning companies whose shares are bought and sold on the stock market—spiked massively in the last few years. Adani Green Energy, Adani Enterprises, and Adani Transmission have seen an approximate 1,000% increase in the past five years. Massive.
Again: How did this happen?
Here are three possible stories
The amazing business story: The 60-year-old school dropout turned diamond and plastics trader is India's largest port operator, manages some of the country's biggest airports, mines coal, and produces power. It's expanding to do more: green energy, media, data centres etc. Money is being pumped to build infrastructure, and someday in the future, the assets will deliver big returns.
It helps that Adani has close ties with Narendra Modi—who famously flew from Gujarat to Delhi in Adani's private jet when taking office in 2014—and his businesses are aligned with the Prime Minister’s nation-building vision.
So Adani is now too big to fail. Investors can't miss this. They went crazy and bought his stocks. The value went up. And Adani became super-rich.
The sceptic story: Adani watchers—including financial journalists—have warned for long that Adani's rise is built on shaky foundations. The stocks are massively overvalued. The company’s financial health doesn't look great. Business fundamentals are weak. They got easy access to loans from Indian banks that funded their initial infra and acquisition-driven growth—but this debt-fuelled growth is not great. And they just got lucky: the government tweaked rules to give them projects, not because they were the best ones to execute these.
The scam story: The story that made news last week, which is basically the sceptic story on steroids.
In an explosive 32,000-word report, the New York-based Hindenburg Research alleged that the Adani Group has engaged in a years-long scheme of fraud and stock market manipulation. All the dirty money words were thrown in: Adani has pulled off the "largest con in corporate history."
It's a big claim. And Hindenburg, which specialises in forensic financial research, has a clear incentive: it's a 'short seller'—guys who do well when companies don't do well.
So they bet against the company's growth. They make money when the stock goes down. Which is why companies hate them and accuse them of manufacturing bad news.
The other view is they play a positive role in the market because they have the incentive to deliver bad news. They look for flaws others overlook.
This is an old debate. So while keeping their incentives in mind is important, it is not reason enough to discount all their claims. To their credit, short sellers called out some of the largest corporate frauds we have seen: Enron, WorldCom and Wirecard.
This report should be taken seriously. Over a two-year investigation, Hindenburg spoke with dozens of individuals—including former senior executives of the Adani Group—reviewed thousands of documents and conducted diligence visits to almost half a dozen countries to prepare the report.
The results were immediate. Adani group stocks took a beating falling up to 20% after the damaging allegations. Last week, its seven listed companies lost a combined $48 billion in market capitalisation.
The Adani Group has denied all wrongdoing, released a detailed rebuttal late yesterday evening (which we will cover tomorrow) and is considering legal action against the investment firm.
For today, let's understand exactly what Hindenburg is alleging and what is the fraud here?
Accusation #1: Stock manipulation
Start with the big question: how did the stock value go up?
Fundamentals first: prices in the stock market are driven by supply and demand.
The price goes up if more people want to buy a stock (demand) than sell it (supply). And vice versa. So if people start selling more, because they don’t believe in the company’s future potential, the price goes down.
Hindenburg's key argument against Adani is that they artificially engineered a condition of scarcity to boost the stock price. Here is how.
The first clue lies in shareholding: Who owns Adani's stocks?
The stocks can be divided into two categories: held by the promoter—Adani and associates—and those held by the public.
The promoter share can be 75%, at most. That's a SEBI rule. And that's roughly how much the Adani promoters own in the group, just around the threshold.
Now, look at the public shareholders, the non-Adani holders. Among the largest are companies outside India. They are called "foreign portfolio investors" and own roughly 20% of the group's stocks.
Elara Capital is one of them. It operates from Mauritius, a country known to host offshore companies.
The weird thing is that Elara almost exclusively invests in Adani—99% of its holdings, about $3 billion in total, are invested in the conglomerate. This is public data.
It raises suspicions: Why is all the money in one group? Who owns it?
It’s not clear. And that’s exactly the point. Hindenburg spoke to former Elara traders who told them the goal of this offshore setup was making it difficult to establish who exactly benefits from this fund.
So do the Adani promoters own it? Possibly, but no one has ever acquired any documentary evidence of it. And that’s by design, a former Elara trader told Hindenburg: “That's the whole beauty of the structure.”
Another former Elara trader said it's obvious Adani controls these shares and nature concealed to hide the beneficiary:
I think this is definitely held by the Adani Group…Because no one else would want to buy [it]. I mean, as any investor, why would you invest with Adani Group? Because you know that the stock is inflated, you know that they cannot be trusted.
This is Hindenburg's claim: These supposed "public" funds that hold Adani stocks are offshore funds tied to Adani.
So Adani is concealing ownership, a practice called "stock parking".
And if you add these suspected entities to promoter ownership, then Adani effectively owns more than 90% of their stocks.
Now, you may ask: so what?
First, if this is true, Adanis are breaking the law on maximum stock ownership. They can't own more than 75%, as per the SEBI rule, but this secretive structure allows them to do so.
Four of the seven listed Adani companies are on the brink of delisting due to high promoted ownership.
Second, this high ownership has direct links with raising stock prices.
If promoters own a lot of their stock, it results in a "low float" situation where a few investors hold a large number of the company's shares. As a result, only a tiny number is available for public trading.
This introduces scarcity. There is less supply. And less supply drives up stock prices.
That's the problem. And so, this manipulated shareholding pattern is cited as one reason for Adani's overvalued stock.
This was supply-side forgery. Now add demand-side forgery to this mix.
Hindenburg claims Adani group is engaging in "wash trading": you artificially inflate the number of transactions happening to show that a lot of people are buying and selling, to show high demand and high investor interest—when nothing like that is happening.
The short-seller used public data on "delivery volume", a unique daily data point reporting institutional investment flows.
Their analysis revealed that offshore suspected stock parking entities—discreetly owned by Adani—account for up to 30-47% of yearly delivery volume in several Adani-listed companies.
So if supply is artificially kept low and demand is artificially kept high, then stock prices will go up.
That's the fraud, Hindenburg claims.
What's more?
Adani used this inflated stock value to raise more money: Promoters pledged shares of their inflated stock as collateral for loans.
This is not in itself a problem but it weakens business fundamentals:
Equity share pledges are an inherently unstable source of lending collateral because if share prices drop, the lender can make a collateral call. If no additional collateral is available, the lender could require a forced liquidation of shares.
Accusation #2: Accounting fraud
There is another use of offshore capital: money laundering. Hindenburg claims that money from shell companies funded some of Adani's listed companies.
"Krunal Trade & Investment" is an example. Mauritius corporate records show that Vinod Adani, the elder brother of Gautam Adani, is one of the directors of Krunal.
This company has no physical address, no phone number, no employees with a Linkedin profile and no web mention of its operations except its vague website, all indicating no signs of genuine operations.
And yet, in 2009-10, Krunal lent Rs 11.71 billion to an Adani private company called Sunbourne Developers. And Sunbourne, in 2020, lent Rs 9.84 billion to Adani Enterprises, an Adani-listed entity.
If you didn't follow, here is what happened: As Hindenburg followed the money trail across the network of Adani's companies, they found a pattern.
First, a Mauritius-based company, secretly owned by Adani, with no real business behind them, would pump money into an Adani private entity in India—which is not on the stock market.
And then this private Adani company will send money to a public Adani company—the ones on the stock market.
Krunal is just one of many such companies in the Adani network: They found 38 shell entities controlled by Vinod Adani or close associates in Mauritius. Thirteen of the identified shell entities had functionally identical websites. Many web domains were registered on the same day.
Similar suspicious transactions are happening with a network of Indian companies too: companies with no actual operations are lending billions.
Why would they move money around like this?
They can do this to dress up companies' balance sheets and engineer accounting to show good financial health and solvency and make it look more creditworthy.
That is: you show a company is making money when it’s not—it’s just money going round and round.
This is "accounting fraud" that Hindenburg alleges, enabled by the giant corporate maze of the Adani group.
Accusation #3: No oversight
Did no one have any clue what was going on? Did no one notice these irregularities?
Two things to note.
One: Missing checks and balances
Companies hire credible external auditing firms—like KPMG, Deloitte, EY and PwC—to independently review their financials and boost investor confidence. This is standard practice.
Hindenburg reports that Adani Group has shunned this approach: a tiny auditor named Shah Dhandharia, which, as of February 2020, had only four audit partners and seven support staff, was hired to audit two of Adani’s public companies, including the giant Adani Enterprises, which has 156 subsidiaries plus affiliates and joint ventures.
Three of its partners were in their twenties, which “is hardly the level of experience or seniority needed to seriously scrutinise one of the world’s wealthiest and most powerful businessmen,” they say in the report.
Red flag, says Hindenburg.
Two: Missing government
In its review, Hindenburg found that the Adani group had been the focus of four major government fraud investigations in the past, which have alleged “money laundering, theft of taxpayer funds, and corruption, totalling an estimated $17 billion”.
But they also note a decade-long pattern of leniency: despite detailed investigative records by the government’s agencies, “virtually every government action has either been stalled, stonewalled or dismissed by other arms of the government.”
But it’s not that all of this went unnoticed. The market has its own way to signal things. If you exclude the Life Insurance Corporation, not even one well-known domestic institution has held a significant stake in Adani stocks. Mutual fund managers have kept out. That says a lot. (LIC’s increasing interest in Adani is a story in itself.)
The bottomline: The Adani story is not just another business story. The implications for its success and failure have far-reaching consequences, including on everyday life of ordinary citizens. We will cover that tomorrow.
Reading list
The Ken’s excellent 2022 report on the mysterious rise of Adani stock price. Scroll’s two-part investigation from 2019 offers great context to the new revelations: how the group expanded, how it funded its expansion. Quartz asks if Adani has become too big to fail. Indian Express has a background on Hindenburg Research. The Wire on why Hindenburg is Adani’s stiffest challenge till date.
