Adani row: An independent probe the way forward

Anyone who is surprised by the allegations of Hindenburg Research about the Adani Group must have been living on another planet. Their allegations include stock manipulation, accounting fraud, undisclosed related party transactions, round tripping of revenue, intricate labyrinth of offshore shell companies pumping billions of dollars into the group, piling up substantially high debt pledging inflated stocks, top management being stuffed with Adani family members, many of whom have been investigated for fraud by regulators in the past and some even pronounced guilty, and more.

These symptoms, suspicions, and whispers about the Adani Group have been in the air all along. After all, normal tycoons do not emerge from near-anonymity to become among the world’s richest in five, six or seven years. Normal companies don’t surge 5500 per cent in three years like Adani Green Energy did. Ordinary businesses do not amass a net worth of the order of $120 billion, adding over $100 billion in just the last three years. Companies above a turnover of Rs 500 crore do not routinely give a return between 60 per cent and 850 per cent over four months, like some Adani companies did.

The smell test was stinking to high heavens all along. We in India just chose to pinch our noses, and our institutions and even regulators did not have what it takes to blow the whistle for obvious reasons. Hindenburg had no such qualms.

But now, the capital market has spoken, with Adani’s listed companies in free fall – over 50 per cent already and counting – shaking the indices. The Group’s much-hyped FPO has now been withdrawn to “protect investors from potential losses,” according to Gautam Adani, even as allegations have been rife that the subscription of the FPO was itself funded by Adani’s shell companies!

A word about Hindenburg. On Wikipedia, Hindenburg Research is characterised as an investment research firm with a focus on activist short selling, founded by Nathan Anderson (a forensic financial researcher) based in New York City. The company is “named after the Hindenburg disaster, which they call a human-made avoidable disaster,” and it generates public reports that allege “corporate fraud and malfeasance”, hoping to profit from their research.

Short selling sounds like a dubious practice, but it is not. It is a trading strategy in which a speculator borrows shares of a company, hoping to buy them back at a much lower price (and return the borrowed shares) at some time in the future, thus profiting from the share price difference between the earlier price and the depleted share price. Except when they willfully work towards manipulating a stock price to fall, the practice is considered perfectly legal and acceptable in most major stock markets. This, in the American trading culture, is part of the practice that keeps capital markets efficient.

The Adani Group is not the first candidate in the sights of Hindenburg Research. In 2014, 2020 and 2021, etc., Hindenburg brought out similar reports on Clover Health, Tecnoglass and Kandi – all US-based companies listed on NASDAQ, bringing most of them to heel in the stock exchanges, and triggering a string of investigations at the same time.

Adani is just another one in the line of what Hindenburg does, namely researching companies they believe are not holding up adequate standards of governance, exposing them, and profiting from the eventual fall of their stock prices. They are transparent about this and given that they have done reports on a variety of companies from across the world, they seem agnostic about whom they investigate.

Their being situated thousands of miles away doesn’t mean that their interest in an Indian conglomerate should be any less, considering that investments in large companies are mostly international in nature in various ways. So, an American company researching an Indian major which plays on the world stage can hardly be surprising.

At last, the spring is released. The opposition parties are making some noise in parliament. The financial institutions have been asked to review the adequacy of debt covers of the Adanis. SEBI, too, has been asked to report on the allegations of the Hindenburg report.

SEBI’s muted response so far is not unexpected. After all, Adani is not just another business group, and we all know why. SEBI probably learnt its lesson from its Sahara experience. Nor may SEBI be as independent as we, the naïve, may believe. But clearly, even if some of the serious allegations of Hindenburg Research are true, Indian investors, public, regulators, and the government have something serious to worry about.

So, how do we move forward? Accusations and counter-accusations flying in public domain is hardly a sensible way to settle the matter. In my opinion, based on my past positions with various regulators, including SEBI, and several stock exchanges at the board level, the best way forward may be as follows:

SEBI should take suo motu cognisance of the Hindenburg Research report and set up a Commission under one of the ‘big four’ accounting firms, preferably not based either in India or the US, to investigate Adani Group for the very specific and verifiable accusations contained therein. SEBI should bear the cost of the investigation to ensure the independence of the inquiry. And if the key accusations are proved, they should recover the fee from the Adanis, along with whatever penalties may become due.

This, or some variant of this, would be the best way forward if the Indian capital market is to emerge stronger from the Hindenburg accusations. This would also establish the credibility of the government, given Adani’s real or perceived closeness to the powers that be. After all, judicial and non-judicial investigations have been triggered in the past even at the behest of some anonymous whistleblowers. In this case, at least we know who the whistleblower is.

Whether or not Adani is guilty of the many accusations of Hindenburg, we owe this to our people, our markets, our investors, Adani’s themselves, and our government.

(The writer is an academic and author, and has been associated with SEBI, and various Stock Exchanges, at the board level)