Hindenburg’s questions on Adani need an impartial reflection

The timing of US short seller Hindenburg’s report on the Adani Group couldn’t have been more propitious. It coincided with Modi 2.0’s last full Budget ahead of the 2024 polls. It stole the show by creating a frenzy across the globe, eroded the billionaire-led group’s market value significantly and knocked Gautam Adani to 17th on Forbes’ list of the world’s richest people from the No.3 spot.

Amidst all the cacophony surrounding the Adani saga, thousands and thousands of retail investors are bearing the brunt as a direct fallout of the plunge in stock prices. It is imperative to seize the narrative – not from the lens of an ivory tower – from the eye of a common investor.

Let’s do some fact-checking. A short-seller by design and default is typically on the prowl for stocks of listed corporations potentially marred by ‘scandals’ ideally well-poised for extreme swings generating free-cash flows for the former backed by an ‘undermining analysis’.

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Such stocks tend to exhibit higher volatility measured by “beta” capturing sensitivity of stock’s returns to market with a value closer to 1 indicating higher sensitivity. Adani Enterprises has an average beta of 0.73 indicating higher sensitivity leaving the stock no stranger to volatility. In contrast, value investors look at stocks through the prism of underlying strengths of the balance sheet in its ability to generate future profits while pointing out if the stock is undervalued or overvalued.

The Hindenburg report raises several questions prompting an impartial reflection.

First, the public in India is well served in learning about the profits made by the short seller in this instance. Interestingly, the short seller itself remains private, oblivious to market reactions serving its own interests well.

Second, the bulk of the report is dedicated to criticism based on so-called ‘stock manipulation’ without casting direct aspersions on the quality of assets sitting on the balance sheets of Adani group entities. Viewed from a long-term investment perspective, it is the latter that assumes far greater significance in determining the outlook of the stock.

Third, it is well conceivable the Adani group benefitted through offshoring operations via tax havens like Mauritius. None will argue about the merits emerging from tightened regulations to prevent listed corporations milking rewards this way; however, the complexity and cobweb of corporate laws in India make it nearly impossible to fill every conceivable ‘loophole’ in almost never-ending conundrum surrounding the wedge between letter and spirit of the law. It would only take a nuanced analyst to inform the number of offshore entities affiliated to US-listed corporations, domiciled in sprawling jurisdictions with consequential impact on corporate taxes paid in the US.

Fourth, there is no denying the Adani Group has significant work to do in putting its corporate structure in compliance with local and international regulations to restore investors’ confidence. Afterall, it is information asymmetry that is precisely devoured by seasoned short sellers laughing all the way to the bank.

Finally, the one common theme emerging in the scathing report relates to purported related-party transactions through offshore operations aimed at ballooning the stock higher. Without defending the suspected route adopted here, one must not miss the wood for the trees. Stock manoeuvre could well serve as a euphemism for stock manipulation, not entirely uncoupled to buyback aimed at bolstering stock price. With fewer shares available as free-float, stock prices will have a propensity to rise.

As some of the marquee institutional investors, including those backed by sovereign wealth funds, continue to repose faith in the long-term story of the Adani group, it wouldn’t be inconsistent if Adani were to delist – even if partially – and go private to restore investor confidence. In any scenario, with diversified core assets consistent with the fundamentally strong Indian growth story, the Adani group should be in a position to regain its previous glory with time.

(The writer is an Assistant Professor of Finance affiliated with a British University based in Dubai. He is a commentator on Business, Finance and Economics issues)