Tuesday, May 21, 2024

Adani Group and Hindenburg’s Allegations

Written By Darshan M (Grade 10)


The name Hindenburg has often been associated with disaster. In May 1931, the German passenger Airship LZ 129 Hindenburg caught fire and got destroyed while trying to dock with its mooring mast in New Jersey causing 35 fatalities. On the other side, SMS Hindenburg was a battlecruiser of the German Imperial Navy during WWI that was scuttled after the Germans surrendered and sold for scrap, now another Hindenburg has struck disaster publishing a torpedo of allegations targeting the once 3rd richest man in the world, Gautam Adani and his Adani Group. 

To understand Hindenburg’s allegations better one needs to make an attempt to understand Adani’s business empire which is divided into four parts: trading, logistics, energy, and Adani Wilmar. Adani Enterprises is the oldest of them all and acts like a mothership that incubates, launches and funds all his new businesses till they are ready to be spun off into separate companies. 

Hindenburg alleges that bank loans were taken by Adani Enterprise for the specific purpose of growing his new companies, but then later divided a part of it to 38 shell companies set up in tax havens allegedly controlled by Vinod Adani, Gautam Adani’s 74-year-old eldest brother, who changed his name when he moved to Dubai in the 1990s where he now lives (though he is reportedly a citizen of Cyprus but a resident of Singapore based of information from the leaked Panama papers documents in possession of the Indian Government). Allegedly, they round-tripped this money back to India as a foreign portfolio investment to inflate the price of Adani’s mothership company, Adani Enterprises. Whose inflated valuations in turn allowed them to borrow even more money and repeat this cycle. 

The second allegation is that because Adani’s off-shore companies held shares in the Adani Groups, it broke SEBI’s listing rules that mandate at least 25% equity in a company to be held by non-promoter inventors. Thirdly, due to the inflated share price the debt to market cap was seen as low masking the fact that it was actually at unexpected levels. This allowed Adani companies to continuously raise fresh loans, part of which were diverted to pay dividends to shareholders. And that 20,000 Cr FPO to raise fresh equity was an attempt by Adani to remedy the situation. 

The tiny and largely unknown auditing firm with just four partners and 11 employees was too young and inexperienced to keep track of the many hundreds and thousands of transactions from over 500 companies in Adani’s table. While Hindenburg’s allegations are serious noted, economist and journalist Swaminathan Aiyar believes that the Hindenburg report may be the best thing that ever happened to Adani. He says this in a positive light – Adani was expanding and diversifying at a breakneck speed, most of it on borrowed money. This is a highly risky strategy and the chances are there that if he fumbled at one it would lead to a domino effect and bring down his entire empire. So Hindenburg may well act like a speed breaker to Adani forcing him to slow down and rethink his business strategy. 

But first, he has to fight the fire that’s already burning and conserve cash. So he’s walking away from bidding for electricity trader PTC India saving 4,000 Cr, scrapped plans to buy the DB power’s coal plant saving 7,000 Cr, pulled out of the 2,000 Cr race to acquire SKS powers, and stopped work at the petrochemical to PVC complex he was building at Mundra costing 35,000 Cr. As a confidence-building measure, he repaid debts of 1,500 Cr to SBI Mutual funds and returned over $2B money he had borrowed by pledging his shares. Assuring his overseas bondholders he is in a comfortable position with 31,000 Cr in cash reserves. As of now, SBI is the largest Indian lender with 4,000 Cr given to Adani Enterprises standing by them. They are largely correct because to promote infrastructure projects in India the government provides an assured rate of return giving lenders a clear cash flow visibility. 

However, he has taken the maximum beatings in the arena of environmental and social governance. Environmentally conscious Norway’s largest pension KLP sold its entire holding of Adani Green Energy as did more than 500 other funds in the EU when it was revealed that he used Adani Green Energy stock as collateral to help the coal mine in Australia. 


However, the cash crunch is showing, even though fortunately for them, no big loan is due till mid-2024, it is raising money against assets extending debt maturities selling equity, and looking for fresh lenders but its fortunes changed dramatically when he got US-based Rajiv Jain to buy into his story whose Australia listed company GQG brought four of his company shares for 15,000 Cr though at a discounted price. Leading to a turn in sentiment as Adani stocks rallied since then recouping part of its $150B route. Adani’s response right at the start of the crisis was to withdraw his 20,000 Cr FPO despite managing to get it fully subscribed. 

Such boldness is not uncharacteristic of him because it was this very attitude combined with a sharp business acumen that got him to where he’s today. It was Congress CM in the 1990s that gave Adani the right to operate a minor port in the Kash desert that didn’t even have a rail connection. To create business for his port, he strategically identified an item India always needed, coal, and began importing it in large quantities. To handle large volumes, he built the world’s largest and automated coal handling facility including 22KM of conveyor belts which allowed multiple ships to unload at the same time. Sure he’s close to the PM who backed him in the $1.1B Haifa port deal in Israel even after the allegations broke out because this is a business Adani is especially good at. 

So, will this crisis affect India’s story? Short answer, yes. India’s valuation as a whole is affected at least for a while. Though previous financial crises have had a far greater impact on Indian indices than this one. However, bank stocks that were just about to stabilize were hit by the failure of the Silicon Valley Bank. Fortunately, 60% of Adani’s borrowings are from abroad, and very importantly, Adani hasn’t yet defaulted and is unlikely to do so. It is only the sentiment that is dragging the market down. Opposition parties will try to get mileage out of the PM’s image because of his closeness to Adani and though the Parliament and SEBI’s probe into Hindenburg’s allegations may result in just a slap on the wrist. This is probably the greatest challenge Adani has ever faced in his life. 


Featured Image Courtesy – Financial Times



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