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Hindenburg is an American company that identifies companies that are overvalued, do not have appropriate business activities, and have possibly scam going on behind the curtain.
On January 24th, they made not one or two but multiple sensational claims against Adani owned companies. Due to these claims, just in three days since Adani group has already lost close to $50 billion in market valuation This article tries to summarize their claims, explain what they mean, and speculate what could happen?
Hindenburg's Claims
Hindenburg has made several lengthy and very specific claims. You can read them here - https://hindenburgresearch.com/adani/.
According to Hindenburg, Adani Group is inflating its valuation and based on those inflated / false valuations raising money in the market to purchase more companies such as NDTV or Ambuja cement etc. That the valuation is inflated through use of offshore shell companies controlled by Adani relatives and in violation of government rules and regulations. They warn that the underlying Adani businesses are severely cash flow negative (meaning they are not generating enough money to repay the loans) and as a result the minority shareholders could be at risk since they purchased such shares at sky high prices. More interestingly Hindenburg also discloses that several investigations of Adani Group related individuals and relatives is already supposed to be ongoing since decades but that the Indian Government hasn't moved ahead despite availability of supporting evidence for fraud allegations.
Now lets go a little deeper into these allegations.
Inflated valuations
Hindenburg says that Adani's companies could only be worth 15 cents on the dollar but they are trading at dollar. Since the total valuation of Adani companies stood at 218 billion dollars on the day of allegations, Hindenburg is indicating that the real value could be only 33 billion dollars. Hindenburg further implies that the value could be even less if the underlying businesses have provided false information about business operations. The report says that despite the fact that Adani businesses operate in infrastructure areas where profit margins and growth prospects are small, they are trading at insane multiples in the share market.
Use of offshore companies
Hindenburg alleges that Adani Group is using offshore entities to inflate these valuations in illegal manner. These offshore entities are based out of Mauritius, Cyprus, UAE, Caribbean Islands and a few other places. They are shell companies that usually have no other business other than moving money. They are moving money to and from private Adani companies into publicly listed Adani companies to create false sense of business operations and valuations. They barely hold enough shares to allow Adani companies to maintain 25% public float as per government requirements. They are owned directly or indirectly by Adani group or related parties. (That’s a lot to digest. Each one of these facts by itself could be a major investigation).
Poor cashflow of Adani businesses
Hindenburg alleges that Adani group has used these valuations to aggressively raise debt and capital to expand. But the business operations do not even generate overall positive cashflow. Hindenburg shows approximately 2 billion dollars of negative free cash flow. Hindenburg also implies that Adani businesses are using way too much debt and that negative free cash flows and high leverage could put the group into a precarious situation.
Fraud allegations and investigations
Hindenburg discloses that since 2004 onwards there have been multiple fraud investigations against Adani group totaling upto $17 billion. That these investigations include import export scam, corruption, money laundering, theft of taxpayer funds, and siphoning of funds from listed companies. Hindenburg further says that despite extensive evidence of wrongdoing, government agencies stonewalled or have delayed all these investigations.
The significance of Hindenburg claims
If these allegations are true then it paints a very disturbing picture of not just Adani group but that of whole Indian capital markets and government agencies.
It would mean that Adani group has potentially inflated its valuations to create an illusion of value to lure in unsuspecting investors – individuals or banks. One can not rule out the use of foreign entities to funnel black money into stock market to make it white (in other words money laundering).
It is interesting to note that Adani became number 3 on fortune 100 list but most of his investors are Indians or related parties from Mauritius, Cyprus etc. None of those investors are foreign investors. How come foreign investors don’t want to profit from Adani’s rise? I have lived in the USA for 22 years and know how much greedy the western capital markets are. It is inconceivable to me that most of the western capitalists would let go this opportunity. But interestingly that seems to be the case.
The scale of the whole thing is so massive that it is hard to believe that Adani is the only group involved in this kind of business dealings. If true, these business dealings are so brazen that they indicate a normal way of operating in Indian capital markets in full violation of SEBI norms and regulations.
So it also raises questions about India’s regulatory and government agencies. How come they are a mute spectator to such financial crimes (if true). If India were to become a world power, then having clean capital markets free of corruption is critical. Having an efficient and just regulatory and government environment is critical. Not having such capital markets and government can only lead to more scams and less wealth creation.
What NOW?
Adani group has responded to Hindenburg. You can view their response here. But according to Hindenburg the response did not answer any of the 88 questions Hindenburg has asked. Hindenburg has doubled down and challenged Adani Group to file a lawsuit in US courts. Adani Group has indicated they might do just that. But it is unlikely that Adani group will file any lawsuit in the US courts. US justice system being the envy of the world, will only result in further investigations and unlike in India won’t stonewall or shield any efforts to unravel Adani group’s dealings.
So if at all Adani group files any lawsuit then it could be in Indian courts asking Hindenburg to stop spreading such “lies”.
The stock value of Adani listed companies have already suffered $50 billion loss. The loss will only deepen as more and more short selling sharks feast on the opportunity.
So government action or inaction is going to be crucial in this. If the government turns this into an issue of National pride and shuns Hindenburg we may see some reversal to the share market slide for Adani Group companies.
But unless Adani group rebuts every single of those 88 questions, the group will significantly suffer more loss of reputation and market value. It could lead to complete unravelling and Adani’s business empire and also have major repercussions on the upcoming Loksabha elections in 2024.
On January 24th, they made not one or two but multiple sensational claims against Adani owned companies. Due to these claims, just in three days since Adani group has already lost close to $50 billion in market valuation This article tries to summarize their claims, explain what they mean, and speculate what could happen?
Hindenburg's Claims
Hindenburg has made several lengthy and very specific claims. You can read them here - https://hindenburgresearch.com/adani/.
According to Hindenburg, Adani Group is inflating its valuation and based on those inflated / false valuations raising money in the market to purchase more companies such as NDTV or Ambuja cement etc. That the valuation is inflated through use of offshore shell companies controlled by Adani relatives and in violation of government rules and regulations. They warn that the underlying Adani businesses are severely cash flow negative (meaning they are not generating enough money to repay the loans) and as a result the minority shareholders could be at risk since they purchased such shares at sky high prices. More interestingly Hindenburg also discloses that several investigations of Adani Group related individuals and relatives is already supposed to be ongoing since decades but that the Indian Government hasn't moved ahead despite availability of supporting evidence for fraud allegations.
Now lets go a little deeper into these allegations.
Inflated valuations
Hindenburg says that Adani's companies could only be worth 15 cents on the dollar but they are trading at dollar. Since the total valuation of Adani companies stood at 218 billion dollars on the day of allegations, Hindenburg is indicating that the real value could be only 33 billion dollars. Hindenburg further implies that the value could be even less if the underlying businesses have provided false information about business operations. The report says that despite the fact that Adani businesses operate in infrastructure areas where profit margins and growth prospects are small, they are trading at insane multiples in the share market.
Use of offshore companies
Hindenburg alleges that Adani Group is using offshore entities to inflate these valuations in illegal manner. These offshore entities are based out of Mauritius, Cyprus, UAE, Caribbean Islands and a few other places. They are shell companies that usually have no other business other than moving money. They are moving money to and from private Adani companies into publicly listed Adani companies to create false sense of business operations and valuations. They barely hold enough shares to allow Adani companies to maintain 25% public float as per government requirements. They are owned directly or indirectly by Adani group or related parties. (That’s a lot to digest. Each one of these facts by itself could be a major investigation).
Poor cashflow of Adani businesses
Hindenburg alleges that Adani group has used these valuations to aggressively raise debt and capital to expand. But the business operations do not even generate overall positive cashflow. Hindenburg shows approximately 2 billion dollars of negative free cash flow. Hindenburg also implies that Adani businesses are using way too much debt and that negative free cash flows and high leverage could put the group into a precarious situation.
Fraud allegations and investigations
Hindenburg discloses that since 2004 onwards there have been multiple fraud investigations against Adani group totaling upto $17 billion. That these investigations include import export scam, corruption, money laundering, theft of taxpayer funds, and siphoning of funds from listed companies. Hindenburg further says that despite extensive evidence of wrongdoing, government agencies stonewalled or have delayed all these investigations.
The significance of Hindenburg claims
If these allegations are true then it paints a very disturbing picture of not just Adani group but that of whole Indian capital markets and government agencies.
It would mean that Adani group has potentially inflated its valuations to create an illusion of value to lure in unsuspecting investors – individuals or banks. One can not rule out the use of foreign entities to funnel black money into stock market to make it white (in other words money laundering).
It is interesting to note that Adani became number 3 on fortune 100 list but most of his investors are Indians or related parties from Mauritius, Cyprus etc. None of those investors are foreign investors. How come foreign investors don’t want to profit from Adani’s rise? I have lived in the USA for 22 years and know how much greedy the western capital markets are. It is inconceivable to me that most of the western capitalists would let go this opportunity. But interestingly that seems to be the case.
The scale of the whole thing is so massive that it is hard to believe that Adani is the only group involved in this kind of business dealings. If true, these business dealings are so brazen that they indicate a normal way of operating in Indian capital markets in full violation of SEBI norms and regulations.
So it also raises questions about India’s regulatory and government agencies. How come they are a mute spectator to such financial crimes (if true). If India were to become a world power, then having clean capital markets free of corruption is critical. Having an efficient and just regulatory and government environment is critical. Not having such capital markets and government can only lead to more scams and less wealth creation.
What NOW?
Adani group has responded to Hindenburg. You can view their response here. But according to Hindenburg the response did not answer any of the 88 questions Hindenburg has asked. Hindenburg has doubled down and challenged Adani Group to file a lawsuit in US courts. Adani Group has indicated they might do just that. But it is unlikely that Adani group will file any lawsuit in the US courts. US justice system being the envy of the world, will only result in further investigations and unlike in India won’t stonewall or shield any efforts to unravel Adani group’s dealings.
So if at all Adani group files any lawsuit then it could be in Indian courts asking Hindenburg to stop spreading such “lies”.
The stock value of Adani listed companies have already suffered $50 billion loss. The loss will only deepen as more and more short selling sharks feast on the opportunity.
So government action or inaction is going to be crucial in this. If the government turns this into an issue of National pride and shuns Hindenburg we may see some reversal to the share market slide for Adani Group companies.
But unless Adani group rebuts every single of those 88 questions, the group will significantly suffer more loss of reputation and market value. It could lead to complete unravelling and Adani’s business empire and also have major repercussions on the upcoming Loksabha elections in 2024.