The Hindenburging Of Adani
Or, why things full of hot air sometimes go boom.
Welcome to the third issue of Business Thoughts. I’m just getting started, and I’m glad to have you here.
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Ok, let’s dive into it...
Hindenburg Attacks. Adani Explodes.
This story begins in India in the late 1980s, when a young Gautam Adani started a commodities trading business that would grow to become what we know today as the Adani Group. Starting off as an importer and exporter of commodities, it wasn’t long before Adani Group ventured into various other lines of business, including port management, mining, energy, sea and rail logistics, and others. By 2022, the Adani Group was pulling in roughly $23 billion USD in revenue, or so they claim. The “Group” itself is a private company owned 100% by its chairman, Gautam Adani. However, the Adani Group contains, within its structure, 7 publicly traded companies.
Now that that’s established, who exactly is this Hindenburg?
Hindenburg Research is an investment research firm focused on short strategies. It’s a pretty simple business: find a company you think is overpriced, do the research showing why, take a short position, publish your research, and…profit? Profit.
Okay, maybe it’s not *quite* so simple. The assets you’ve shorted do actually need to fall in value in order for you to make money. And if they instead gain? It gets painful, fast. So, if you’re in this business, it’s best if your research makes waves. Ideally, big, bad waves. Sometimes it works out (see, e.g., Einhorn re: Lehman, Burry re: sub-prime); other times, not so much (see, e.g., Ackman re: Herbalife).
One thing we can say (more-or-less) for sure is that calling a big short is a great way to make a name for yourself. In the case of Dr. Michael J. Burry, you can even get yourself portrayed in a movie by no less than Christian Bale. Might there be a feature film portrayal in (Hindenburg founder) Nathan Anderson’s future? We’ll see. But with naming his doom-predicting investment shop after the world’s worst flaming blimp disaster, the man clearly has the whole “flair for the dramatic” thing down pat.
But okay, on to the main course: what’s all the recent hubbub about?
On 24 January 2023, Hindenburg published a scathing report on the Adani Group, detailing the results of a 2-year-long investigation conducted by the firm. Like a lot of the things I cover here on Business Thoughts, the report is wild. It’s both incredibly well-researched and chock full of allegations that, if true, defy imagination as to the bounds of public company securities fraud.
The biggest allegation is that share prices of the Adani Group’s public companies are artificially propped up by investment / share ownership by what, at first, seem like independent investment funds but are, in actuality, entities controlled by one or more Adani family members. If you’re interested in this stuff, the Hindenburg report is worth a read. Ultimately, though, what you get is a look at a big convoluted mess that seems to rhyme with schmarket schmanipulation.
But there’s actually a bit more to it than that. For one, there’s potential violations of exchange rules which would result in the delisting of the securities. Namely, if you were to include the ownership stakes by these supposedly independent investment funds as “promoters” (or, as we say in the US, “insiders”), then the securities would need to be delisted from the stock exchange on which it trades for violating SEBI’s Minimum Public Shareholding (MPS) rule. (“SEBI” being the Securities and Exchange Board of India, or India’s version of the US SEC.) So, there’s brazen frauds, extra-brazen frauds, and then there’s whatever this is. Got it.
But there’s sort of a lingering question, now that we’ve brought SEBI into the mix. Securities regulators, like cops, might see blood on the wall and go looking for a body. In the US, if something like this were to even appear to occur, you could bet a few bucks that the SEC would be out there with bloodhounds. So, what’s SEBI been up to?
From the Hindenburg report:
Monterosa Group, like many of the Mauritius shareholders, has gained a reputation in specialist circles as a front for the Adani Group.
Hindenburg spoke with a broker, who has been banned from Indian markets for manipulating Indian stocks using Mauritius-based funds, about Monterosa.
Our source stressed that Mauritius-based funds were a vehicle to “cut the trails” and conceal the identity of an investor bringing cash from overseas into the Indian market.
He alleged – based on his own track-record of dealing with regulators and being investigated by them – that SEBI is aware that conglomerates like the Adani Group are using Mauritius funds to flout laws on maximum stock ownership, and that SEBI participates in the schemes due to bribes.
Shocking, right? Not really. Because that’s the thing, not just with Hindenburg and Adani, and maybe even not just with SEBI: as more the rule than the exception, emerging markets tend to have latent and heavily entrenched corruption issues. It’s one of the biggest problems with getting FDI inflows to places like India and other emerging economies. There needs to be trust, and it’s sadly in short supply.
Regulators like SEBI provide that trust, or at least they’re supposed to. But here, where it may well be the case that the regulators are “in on it,” one has to realize that it doesn’t even matter if Hindenburg, or anyone else, can prove that SEBI was either turning a blind eye to the scheme or going so far as to actually benefit from it. The credible suspicion alone is likely sufficient to deter more than a few would-be investors who might have been considering a foray into the emerging market.
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Post-publication, there’s been no shortage of back-and-forth: just 5 days later, Adani came out with a staggering 413-page response. Of course, Hindenburg quickly fired back.
There’s some hilarious “argumentation” from both sides. The Adani Group states in rebuttal that, inter alia, Vinod Adani (brother of Adani Group Chairman Gautam Adani) isn’t a “related party,” and that the company isn’t required to disclose the source of capital of the above-referenced Mauritius-based investment funds investing in the Adani Group companies’ public securities. On the first point, lol, and on the second, sure, no one ever said Adani Group was required to, but stating that you’re not required to doesn’t exactly do anything to allay suspicions that the source of funds was, indeed, improper. But alas…
Hindenburg points to all that and basically says “see?!?!,” which likewise falls short of being an actual argument. But, nevertheless, a job done is a job done. The market has spoken, and it believes Hindenburg.
Now it’s time to get a little controversial.
In their reply to the Adani response, Hindenburg throws out this cute little gem of a CYA caveat:
To be clear, we believe India is a vibrant democracy and an emerging superpower with an exciting future. We also believe India’s future is being held back by the Adani Group, which has draped itself in the Indian flag while systematically looting the nation.
Now, I’m only Indian-American, not “Indian-Indian,” so I don’t know if I’m authorized to do this, but: Hindenburg, I’m issuing you guys a pass. This attack on the Adani Group doesn’t appear to be, in any way, motivated by racism against Indians, or any anti-Indian sentiment. But I fully understand why, in this discursive climate, and being a US-based firm founded and led by a white guy, it’s probably the right idea to preface further comments with that sort of a statement. And sure, the Adani Group didn’t shy away from casting racist aspersions on Hindenburg in their response, but frankly, they’d say just about anything to jump out of the bath they currently find themselves boiling in. No points to them there.
But I want to focus on the substance of Hindenburg’s statement itself, because I don’t think it’s entirely true. India’s a democracy, to be sure, but the nature of that democracy is fraught with issues that make America, by contrast, seem positively utopian. Purging of electoral rolls? You bet, and targeting a religion no less. Freedom of the press? Not as much of a thing these days. (And let’s not forget about the Indian government’s illegal use of Pegasus spyware against opponents, dissidents, journalists, etc.) There was the whole big COVID death toll cover-up, lest we forget. And here’s a scary one: if I were to ask you whether being charged with “spreading communal disharmony” is something that could happen to you in the US, or in China, which would you think? Weirdly enough, the answer is actually India.
So, vibrant democracy? Sit down.
India may well have an exciting future in store for it, but that future is only possible if its governmental institutions start behaving like democratic, trustworthy institutions. And lately, that just hasn’t been the trend. But, to bring this back full circle, with SEBI, has that ever really been the trend?
See, the Hindenburg report seeks to paint Adani (whether Gautam or Group) as the villain here. “Ooh, big bad industrialist and his house-of-cards company have likely committed some super shady, years-long securities offenses!” Sure. But where the hell was SEBI during all this?
I don’t blame Hindenburg for focusing on Adani and not SEBI or the Indian government at large. After all, they’re not an international NGO, they’re an investment research firm in the business of making money through targeted shorts. You can’t short SEBI, and you can’t (really) short the Indian government, but you absolutely can short the Adani Group.
Nevertheless, it would be a mistake to think that the most vital takeaway from the Hindenburg report is that Gautam Adani and the Adani Group are uniquely bad actors whose offenses exist in some sort of idiosyncratic vacuum—that is to say, that they, themselves, are the entirety of the problem. Rather, I posit that they are merely symptoms of an underlying, festering rot that threatens all of India’s potentially bright future: its failed regulatory institutions, such as SEBI.
Because, see, it actually is possible to short the Indian government—and, therefore, the Indian people—by declining to invest in India. And that, like it or not, is the eminently valid subtext of the Hindenburg report: a complete lack of regulatory guardrails for investors in India.
Gautam Adani didn’t loot India as a nation; it’s the Indian government that did, as it allowed Adani—the man and his company—to metastasize, unchecked, for decades. Furthermore, if you think Adani is a unique case, you couldn’t be more wrong. Adani was simply the tallest poppy in a field that is woefully full of them.
India, it’s time to mow the lawn. Your bright future depends on it.
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