MUMBAI- Shares of India’s Adani Enterprises (ADEL.NS) plunged on Friday after a scathing report by a U.S. short seller triggered a selloff in the conglomerate’s listed firms, casting doubts on the success of the company’s record $2.45 billion secondary share sale.
Seven listed companies of the Adani conglomerate – controlled by one of the world’s richest men Gautam Adani – lost a combined $48 billion in market capitalisation, with U.S. bonds of Adani firms also falling after Hindenburg Research flagged concerns in a Jan. 24 report about debt levels and the use of tax havens.
The rout led to a near 20% fall in shares of Adani Enterprises, the group’s flagship company, well below the offer price of its secondary sale. As bidding started on Friday, the issue was subscribed around 1%, raising concerns over whether it would be able to proceed.
“The news cycle in the past few days has clearly impacted the share sale and you can clearly see that in the subscription levels, especially the low retail participation,” said Narendra Solanki, fundamental research head at domestic brokerage Anand Rathi.
The Adani Group was concerned but prepared to wait it out for now as the share sale continues until Jan. 31, two people with direct knowledge of the situation said.
India’s capital markets regulator is studying the Hindenburg report as it may help its own probe into offshore fund holdings of Adani Group, two other sources said. Spokespersons for the regulator and Adani had no immediate comment.
Adani Group dismissed the Hindenburg report as baseless and said it is considering whether to take legal action against the New York-based firm.
With a net worth of $96.6 billion, billionaire Gautam Adani is now the world’s seventh richest man, according to Forbes, slipping from the third position due to the stock rout.
The 60-year-old hails from the western state of Gujarat, the home state of Prime Minister Narendra Modi. India’s main opposition Congress party has often accused Adani and other billionaires of getting favourable policy treatment from Modi’s administration, allegations the billionaire denies.
The Adani Group was established in 1988, beginning with commodities trading. The conglomerate’s business interests now extend from ports and airports to mining and renewable power.
The anchor portion of the share sale that began on Friday saw participation from investors including the Abu Dhabi Investment Authority and Maybank Securities on Wednesday.
Shares of the listed Adani firms that plummeted on Friday include Adani Transmission Ltd (ADAI.NS), Adani Total Gas (ADAG.NS) and Adani Green Energy (ADNA.NS) sinking 20% each – marking their worst day ever – while Adani Ports and Special Economic Zone (APSE.NS) fell 16.3%.
At the end of the first day of the share sale, investors, mostly retail, had bid for around 470,160 shares in the Adani Enterprises share sale, compared with 45.5 million on offer, according to Indian stock exchange data. The share sale is being managed by Jefferies, India’s SBI Capital Markets, and ICICI Securities among others.
The firm has set a floor price of 3,112 rupees ($38.22) a share and a cap of 3,276 rupees. But on Friday the stock ended at 2,761.45 rupees – well below the lower end of the range.
Anand Rathi’s Solanki said “with the current market price below the share sale offer price, it further puts doubts on issue subscription.”
Investors’ worries extended to Indian banks with exposure to Adani debt. The Nifty Bank index (.NSEBANK) fell over 3%, while the broader 50-share Nifty index (.NSEI) ended down 1.6%.
CLSA estimates that Indian banks were exposed to about 40% of the 2 trillion rupees ($24.53 billion) of Adani Group debt in the fiscal year to March 2022.
“There is nothing alarming about Adani exposure and we don’t have any concerns as of now,” Dinesh Kumar Khara, chairman of the country’s largest lender State Bank of India, told Reuters, adding that Adani hasn’t raised any recent funds from the bank.
“SKY-HIGH VALUATIONS”
Adani met the country’s power minister R.K. Singh on Friday, but the agenda of the meeting was not immediately known.
U.S. dollar-denominated bonds issued by Adani Green Energy (ADNA.NS) fell to just under 77 cents on the dollar to their lowest since November, Tradeweb data showed. read more
In its report, Hindenburg said key listed Adani Group companies had “substantial debt”, putting the conglomerate on a “precarious financial footing”. It also said “sky-high valuations” had pushed the share prices of seven listed Adani companies as much as 85% beyond actual value.
Billionaire U.S. investor Bill Ackman said on Thursday that he found the Hindenburg report “highly credible and extremely well researched.”
Hindenburg said it held short positions in Adani through its U.S.-traded bonds and non-Indian-traded derivative instruments.
Adani Group has repeatedly dismissed concern about its debt levels, defending itself in a presentation titled “Myths of Short Seller” on Thursday.
Jefferies said in a client note it does not see material risk to Indian banks from the group’s debt. Adani has said its borrowings are manageable and no investor has raised any concern.
Adani has been diversifying its business interests and last year bought cement firms ACC (ACC.NS) and Ambuja Cements (ABUJ.NS) from Switzerland’s Holcim (HOLN.S) for $10.5 billion. ACC shares slid 13.2% on Friday, while Ambuja plunged 17.3%.
For Hindenburg Research, Adani Group Is A ‘Man-Made Disaster’ In The Making
In 1937, a hydrogen-powered German airship flying into New Jersey caught fire and crashed, killing 35 passengers on board. It was sort of a man-made disaster as some 100 people were loaded on to a balloon filled with the most flammable material in the universe. The airship was named Hindenburg.
Eight decades later, in 2017, a graduate of international business management from the University of Connecticut founded a “forensic financial research” firm to specialise in spotting wrong-doings and frauds, or what it calls “man-made disasters”, at companies around the globe and take market bets against them. Founder Nathan (Nate) Anderson named his firm Hindenburg Research after the doomed airship.
This week, Hindenburg ignited a fierce firestorm that threatens to singe Asia’s richest man, Indian tycoon Gautam Adani, who presides over a sprawling empire that now spans from ports and airports to energy, cement and data centres.
On Wednesday, it released a report that alleged the Adani Group had “engaged in a brazen stock manipulation and accounting fraud scheme over the course of decades”. The disclosure sparked a USD 51-billion sell-off in shares of his group companies over two trading sessions, pushing him four places down on the world billionaire index.
Worse, it came ahead of a Rs 20,000-crore follow-on share sale in Adani Enterprises. The share sale could get subscribed up to a meagre 1 per cent on the opening day, Friday, when Adani Enterprises shares fell 18.5 per cent, slipping below the offer price.
Adani group has since rubbished the report as a “malicious combination of selective misinformation and stale, baseless and discredited allegations”. That, however, hasn’t stopped investors from selling off.
On Friday, shares of Adani Group companies continued their loosing streak for the second day with Adani Enterprises dropping a massive 18.5 per cent and Adani Ports & SEZ 16 per cent, taking the broader benchmark index — the Sensex – down by 874.16 points or 1.45 per cent.
WHAT DOES HINDENBURG RESEARCH DO Hindenburg engages in activist short selling, which involves selling borrowed stocks in hopes of buying at a lower price later. If prices fall expectedly, short sellers make a killing.
Hindenburg, which invests its own capital, takes such bets based on its research, which looks for “man-made disasters” such as accounting irregularities, mismanagement and undisclosed related-party transactions.
It especially looks for “accounting irregularities; bad actors in management or key service provider roles; undisclosed related-party transactions; illegal/unethical business or financial reporting practices; and undisclosed regulatory, product, or financial issues” in companies.
“While we use fundamental analysis to aid our investment decision-making, we believe the most impactful research results from uncovering hard-to-find information from atypical sources,” the company website says.
Hindenburg’s past targets include Lordstown Motors Corp (US), Kandi (China), Nikola Motor Company (US), Clover Health (US) and Tecnoglass (Colombia).
Short sellers, however, aren’t admired by most. Companies targeted by the activists have been pushing regulators to go after these short sellers as they may be indulging in some sort of insider trading. Supporters, however, say that the research actually uncover frauds and do more good than harm to investors.
PEOPLE BEHIND THE SCENE Not much is known about the company, besides its 38-year-old founder Anderson, who lived in Jerusalem, Israel before returning to the US where he first took up a consulting job with a financial data company FactSet and then worked at broker dealer firms in Washington DC and New York.
Before he founded Hindenburg, Anderson worked with Harry Markopolos, who had flagged Bernie Madoff’s Ponzi scheme, to investigate Platinum Partners, a hedge fund that was eventually charged with fraud worth USD 1 billion.
While living in Jerusalem, Anderson volunteered for a local ambulance service.
PAST TARGETS Hindenburg is best known for its bet against electric truck maker Nikola Corp in September 2020 for its “alleged lies and deceptions” in years leading up to its proposed partnership with General Motors.
Among dozens of other issues, it challenged a promotional video Nikola produced showing its electric truck cruising at high speed. This it said was nothing more than a truck being rolled down a hill in the Utah desert, a claim the company later admitted and its founder and executive chairman Trevor Milton resigning.
Nikola, which agreed in 2021 to pay USD 125 million to settle a case with the US Securities and Exchange Commission, listed in June 2020 and its valuation touched USD 34 billion at peak but is now worth USD 1.34 billion.
Hindenburg’s website lists over a dozen companies where it has flagged alleged wrongdoings. These include WINS Finance, which Hindenburg revealed had failed to disclose to US investors an RMB 350 million asset freeze imposed on one of its subsidiaries in China; the “zombie company” China Metal Resources Utilization which had a “100 per cent downside” and was “under severe financial distress” with “numerous accounting irregularities”; SC Worx’s “completely bogus” Covid-19 testing deal; “massive undisclosed related party transactions, including a USD 509 million merger” at HF Foods; “billions of dollars in undisclosed off-balance sheet liabilities” of Bloom Energy; and a whistleblower report to the United States Securities and Exchange Commission (SEC) “relating to RD Legal, a hedge fund that was later charged by the commission for allegedly making material misstatements to its investors”.
Almost all of Hindenburg’s work has been followed up by legal or regulatory action, according to its website.
ACTIVIST SHORT-SELLING To take a short position, investors sell borrowed stock in hopes of buying it back at a lower price later. If prices fall expectedly, they make a killing. If the price rises instead, they would have to buy stock to ‘cover’ what they borrowed.
Short sellers however aren’t admired by most. Companies targeted by the activists have been pushing regulators to go after these short sellers as they may be indulging in some sort of insider trading. Supporters however say that the research actually uncover frauds and do more good than harm to investors.
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