Adani Empire's Short Seller Attack Shows Risks of Going Global

Gautam Adani's conglomerate has diversified into everything from green energy to media, and his fortune has soared by $40 billion in the last year. He has ambitious expansion plans from Israel to Morocco.

The global spotlight has arrived, but not in the way that he wanted.

Hindenburg Research, a US short seller, has characterized the world’s fourth-richest man as the target of the “largest con in corporate history” in a Jan. 24 report. This has led to a $12 billion wipeout for Adani investors in a day — an extraordinary turnaround in fortune for a group of stocks, many of which led gains in the S&P BSE 200 Index last year.

Adani has denied a report that it is seeking to raise $2.5 billion from institutional investors, calling it a reputational hit to the company's global ambitions. However, the charges may turn away potential investors from whom Adani is seeking legitimacy and funding.

Adani has largely managed to avoid scrutiny in his home country, where he has mostly faced criticisms over high levels of debt and political barbs for his perceived proximity to Prime Minister Narendra Modi. None of that came close to hurting his conglomerate’s meteoric rise.

Hindenburg Research, a small short seller, has a history of taking down companies like Nikola Corp., an electric vehicle maker. This may be changing.

Deepak Shenoy, the chief executive officer of Bengaluru-based wealth management firm Capitalmind, said that if you become rich you should expect to be questioned.

‍"Everybody's going to question how come these companies are worth so much," he said.

The Adani Group was last questioned in August, when CreditSights released a report highlighting the rising and massive leverage across the conglomerate. The following month, CreditSights dialed back its tone after the group issued a 15-page rebuttal, saying leverage ratios of its companies were “healthy” and citing its own calculations on how debt had reduced. While the initial report did hurt some of the group’s stocks, many of them rebounded later.

But the allegations by Hindenburg are markedly different from previous ones, and the short seller is unlikely to back down, posing the biggest challenge yet for Adani, 60. The firm said the Adani Group was involved in "brazen" market manipulation, accounting fraud, and used offshore shells for money laundering and siphoning from listed companies.

Hindenburg Research has released a report claiming that Adani Group's valuation metrics are comparable to "frothiest of high-growth tech companies," yet the underlying businesses are "relatively sleepy, low growth, low multiple enterprises." According to Hindenburg, this discrepancy represents 85%+ downside purely on fundamentals.

Adani's business empire is expanding rapidly. The company is expanding its operations in a number of sectors, including mining, infrastructure, and energy. Adani is also expanding its presence in new markets, such as the United States.

The Adani Group has dismissed a recent report by Hindenburg Research as "a malicious combination of selective misinformation and stale, baseless and discredited allegations." The group has questioned the timing of publication on the eve of Adani Enterprises Ltd.'s follow-on offer, and has said it is exploring legal action against Hindenburg.

When asked for further comment on Thursday, a spokesperson for Adani Group referred to the company’s two earlier statements issued in response to the Hindenburg report.

Many analysts in India believe that the Adani Group will not be significantly affected by the recent controversy, as the group's success is closely linked to Modi's infrastructure development goals for the country.

“The short position has gained traction due to its timing in relation to the follow-on offer,” said Sameer Kalra, founder of Target Investing in Mumbai. “It is likely that Hindenburg will exit after small declines, given the lack of liquidity in the stocks. India has not been historically good at rewarding short sellers.”

The explosive claims could have a damaging effect not just for the $2.5 billion follow-on share sale this week, which is aimed at broadening the investor base of the thinly-traded stock and reducing debt, but also over a longer time horizon as more Adani companies seek investors. The real test for the follow-on offer, a fund-raising route that hasn’t been popular in recent years, will be when it opens for retail subscriptions on Friday.

The conglomerate plans to list at least five companies between 2026 and 2028, Jugeshinder Singh told Bloomberg News earlier this month. This would be a great way to raise money for the conglomerate and would help them expand their business.

Adani has come under increased scrutiny from environmentalists in recent years for his development of new fossil fuel projects, despite his foray into green energy. His coal mining operations in Australia have been the target of climate activists, who argue that they contradict his stated commitment to sustainability. Adani is a first-generation tycoon who made his fortune in the coal trade, and many believe that his continued involvement in this industry undermines his efforts to establish himself as a leader in clean energy.

There have been some regulatory investigations by government agencies at the local level, but none of them have posed a serious threat to the group's expansion.

In June 2021, there was a short-lived selloff after India's junior finance minister told lawmakers that some of the companies were being probed for possible violation of local laws.

Nate Anderson's Hindenburg has gone further than anyone else in fighting the Adani conglomerate, raising 88 questions with ugly allegations. Their track record is significant: on average, the stocks of the approximately 30 companies Hindenburg has targeted since 2020 have lost 15% the next day, according to calculations by Bloomberg News. The shares were on average 26% down six months later.

"Given Hindenburg's reputation, it is likely that these allegations have been thoroughly researched," said Guillermo Hernandez Sampere, head of trading at asset manager MPPM GmbH.

For some people, this reckoning has been a long time coming.

Adani has managed to amass a great deal of political power and influence, according to Sharmila Gopinath, a specialist India adviser at the Asian Corporate Governance Association. She notes that he has done so with relatively little scrutiny, which is somewhat surprising.