Why Fraud Allegations Against the Adani Group Can Hurt the Indian Economy
The Hindenburg airship which blew up in 1937 in the USA. Courtesy Wikimedia Commons.
January 25, 2023*
India’s demographics are very attractive to businesses since roughly a third of its 1.4 billion population is below the age of 18. But, by 2030, India needs to create 145 million new non-farm jobs in large part to employ the youth entering the labor market. To accomplish this goal, there is need for rapid economic growth. This can occur if more than $2 trillion is invested in railways, roads, bridges and other infrastructure as well as in manufacturing and other industries.
Since the Indian government does not have the ability to fund such massive investments – it is running large budget deficits - Prime Minister Narendra Modi has eagerly sought foreign companies and funds to invest in India.
Given the higher risk of investing in a developing country like India, foreign investors typically seek 10% plus real returns and that too in U.S. dollars. Foreign investors, who are interested in India, seek to achieve such returns by partnering with private Indian companies which have a dominant market position and strong ties to the ruling party and government in India.
The Adani Group, based in Ahmedabad, India, has attracted major foreign investors. In June 2022, for instance, Total Energies of France announced it will acquire a 25% stake in Adani New Industries. The Indian ventures plans include building a plant to produce 1.3 million tons of urea fertilizer, using green hydrogen, and investing around $5 billion in a 2 Giga Watt (GW) hydrogen electrolyzer, fed by renewable power from a 4 GW solar and wind farm. Earlier in 2020, Total invested $2.5 billion for partial ownership in Adani’s solar businesses.
Another foreign partner of the Adani Group is the International Holding Company, a conglomerate based in Abu Dhabi. In April 2022, it announced it will invest $2 billion in three Adani companies
But now a recent analyst report raises questions about the operations of the Adani Group. The “INR 17.8 trillion (U.S. $218 billion) Indian conglomerate Adani Group has engaged in a brazen stock manipulation and accounting fraud scheme over the course of decades,” notes a report published by Hindenburg Research this week. The report, by the U.S. investment research firm, is titled “Adani Group: How the World’s 3rd Richest Man Is Pulling The Largest Con in Corporate History.”
The report, Hindenburg states, was based on its two-year study, “speaking with dozens of individuals, including former senior executives of the Adani Group, reviewing thousands of documents, and conducting diligence site visits in almost half a dozen countries.” The firm expects to profit from the decline in the stocks and bonds of the target companies following its exposes.
The Hindenburg Report “is a malicious combination of selective misinformation and stale, baseless and discredited allegations that have been tested and rejected by India’s highest courts,” according to a statement by The Adani Group. “The Group has always been in compliance with all laws, regardless of jurisdiction, and maintains the highest standards of corporate governance.”
The Adani Group was founded and is run by Gautam Adani, 60 -years-old, who is based in Ahmedabad, India. In addition to owning power plants, transmission lines and coal mines, the group’s operations include running the Mumbai airport and other airports; Mundra, India’s largest port and other ports; consumer goods including edible oils; cement and real estate businesses in India and abroad.
Hindenburg says, in addition to using fundamental analysis, its “most impactful research results from uncovering hard-to-find information from atypical sources…Accounting irregularities. Bad actors in management or key service provider roles. Undisclosed related-party transactions. Illegal/unethical business or financial reporting practices. Undisclosed regulatory, product, or financial issues.”
Vinod Adani, the elder brother of Gautam Adani, “through several close associates, manages a vast labyrinth of offshore shell entities,” the Hindenburg report states. “We have identified 38 Mauritius shell entities controlled by Vinod Adani or close associates. We have identified entities that are also surreptitiously controlled by Vinod Adani in Cyprus, the UAE, Singapore, and several Caribbean Islands. Many of the Vinod Adani-associated entities have no obvious signs of operations…Despite this, they have collectively moved billions of dollars into Indian Adani publicly listed and private entities, often without required disclosure of the related party nature of the deals.”
The Vinod Adani shells, the Hindenburg report adds, seem to serve several functions, including “stock parking/stock manipulation” and “laundering money through Adani’s private companies onto the (Adani Group’s) listed companies’ balance sheets in order to maintain the appearance of financial health and solvency.”
Since 2016, Hindenburg has published critical reports on several companies. On its website, it lists eighteen cases where its research led to declines in company valuations and fines and other punitive actions by regulatory authorities. In 2020, one of the reports “called out a vast array of alleged lies and deceptions by Nikola in the years leading up to its proposed partnership with General Motors.”
Last year, a U.S. jury convicted Trevor Milton, the founder of the electric vehicle start-up Nikola, of “fraud over allegations he lied to investors,” Reuters reported. In 2021, Nikola agreed to pay $125 million to settle with the U.S. Securities and Exchange Commission over its representations to investors. Nikola went public in 2020, reaching a peak stock market valuation of $34 billion some days later. It now has a value of $1.3 billion.
In 2014, Adani’s net worth was $2.8 billion, according to Forbes. He is from Gujarat. That year Narendra Modi, the former Chief Minister of Gujerat, took over as India’s Prime Minister. Adani “has profited since fellow Gujarati Narendra Modi, India’s most influential prime minister in decades, took office in 2014,” according to AP News.
By September 2022, Adani’s net worth rocketed up more than 50-fold tomore than 50-fold to $152 billion, according to Forbes. His current net worth is $119 billion, according to the magazine, making him the richest person in India and third richest in the world.
Hindenburg report states that “Even if you ignore the findings of our investigation and take the financials of Adani Group at face value, its 7 key listed companies have 85% downside purely on a fundamental basis owing to sky-high valuations.”
If the valuation of the Adani Group declines sharply, based on valuations alone, will its foreign partners suffer losses on their investments in the group? If there are losses, it will likely dampen demand from foreign investors to invest in India, especially in much-needed infrastructure projects.
(*Story updated January 29, 2023)
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