Adani Saga Serves as Warning of Single-Stock Risks in India

The Adani saga has bubbled back to the surface again. The short seller who sparked a selloff in the conglomerate’s listed companies is now squaring up to India’s stock watchdog. The whole episode illustrates a lot that’s wrong with the Indian equity market, and highlights why investors into India are likely best off to avoid single-stock risk.

You may recall that I went into detail on the Adani Group back in January 2023, when the short-sale specialist Hindenburg Research launched a full-frontal attack on the group, alleging Adani was pulling off the “largest con in corporate history.”

New York-based Hindenburg has now received a “show cause” notice from the Securities and Exchange Board of India (SEBI), the securities regulator, typically issued before legal action begins. Or, the firm appears to have received one. I’ll explain …

Hindenburg, run by Nate Anderson, first got an email from SEBI retracting an email from SEBI, as the hedge fund outlines on its Web site. It seemed like a phishing attempt. But then the actual 46-page notice arrived, which Hindenburg has also posted online.

Kingdon Connection

The notice breaks down in great detail all the trading surrounding the publication of the Hindenburg report. It also outlines how Anderson cooperated with hedge-fund manager Mark Kingdon, who set up Kingdon Capital back in 1983, to share the report ahead of publication, and profits of selling Adani stocks short after it came out.

Though the Kingdon connection wasn’t public before, it’s common for a small short seller like Hindenburg to partner up with a larger investor that can take bigger positions, typically getting a cut of the profits in exchange for the research. Kingdon says in a filing that it had US$623 million in assets at the start of last year in two strategies: global long/short equity and global long/short healthcare.

SEBI alleges the Hindenburg report contained “certain misrepresentations/inaccurate statements.” These built a “convenient narrative” through selective information, reckless statements and catchy headlines, “to mislead readers of the report and cause panic in Adani Group stocks,” leading of course to maximum profit from shorting the shares.

The “show cause” notice demands that Hindenburg and New York-based Kingdon “show cause” why they shouldn’t be forced to disgorge illegally made trading profits in Adani, as well as cause why they shouldn’t be fined and penalized under Indian securities law. They have 21 days to respond to the allegations.

Hindenburg’s immediate response is to call the show-cause notice “nonsense concocted to serve a pre-ordained purpose,” namely to “silence and intimidate those who expose corruption and fraud perpetrated by the most powerful individuals in India.”

Phew. This is going to be a brutal fight.

Hindenburg says it was expecting “fierce opposition” as soon as it put out its report. It was taking on a giant of Indian industry. While the initial rebuttals came from the company, Hindenburg says it’s now evident SEBI began investigating Hindenburg as soon as the shorting attack began.

Flagship Adani Enterprises saw its share price skyrocketed 25-fold between their Covid bottom in the spring of 2020 and the Hindenburg shorting report. Those kinda gains put even Nvidia NVDA to shame.

The group’s listed companies compiled US$153 billion in market-capitalization losses after the short-sale report came out. The flagship was forced to call off a planned US$2.5 billion secondary offering after the shares declined.

Besides Adani Enterprises, group companies include wind-and-solar power generator Adani Green Energy, ports operator Adani Ports and Special Economic Zone, thermal-power producer Adani Power, natural-gas distributor Adani Total Gas, electric utility Adani Transmission, foodstuffs manufacturer Adani Wilmar, and affiliate Ambuja Cements. The stocks have since generally recovered.

Questions Not Resolved

One of the key Hindenburg claims is that Adani founder Gautam Adani and his family, in particular his Dubai-based brother Vinod, had been using offshore corporate shells to pump their own money into group-company shares. Roundtripping would itself illegally drive up the share price, while it’s also against Indian securities law for insiders to own more than 75% of the shares of their own listed company, to prevent manipulation.

Adani, who has a rags-to-riches background from the state of Gujarat, has close ties to Indian Prime Minister Narendra Modi, who is from the same state, and was Gujarat’s chief minister when Adani rose to prominence. Adani companies have benefited from huge government contracts, particularly in power plants and infrastructure, while Modi flew to Delhi on Adani’s private plane when he first won election.

Adani has repeatedly issued blanket denials of the Hindenburg charges, even issuing a 413-page PDF tome of a response, without really refuting issues like the roundtripping via corporate shells. In fact, the group admitted that Vinod Adani is part of the Adani “promoter group,” with insight into operations and control over company affairs, while at the same time insisting he had “no role in the day-to-day affairs” of the group, and therefore couldn’t possibly know where the money invested into the group originates.

And SEBI has looked into the allegations only to essentially come to no conclusion, with court-appointed panel saying in May 2023 that the watchdog has “drawn a blank” trying to find out who exactly owns the offshore funds investing into the Adani Group. Any further pursuit of the case would be a “journey without a destination,” that panel concludes.

Case closed! Nothing to see here, move along now, ladies and gentlemen. …

So you do have a politically connected conglomerate where cases get resolved with small fines, or dropped. Adani also made the 2023 episode explicitly political. It went so far as to call the Hindenburg report a “calculated attack on India, the independence, integrity and quality of Indian institutions, and the growth story and ambition of India.”

SEBI now appears to have turned its attention away from any further investigation into Adani, targeting its attackers instead. It says the Mauritius fund set up by Kingdon Capital reaped US$22 million by closing off shorts in Adani. A 30% cut due to Hindenburg was reduced to 25% because of the difficulty setting up the positions, SEBI says.

The work we are "most proud of"

Hindenburg does concede that it made US$4.1 million in gross revenue from its relationship with Kingdon, and US$31,000 via a “tiny” direct position shorting U.S.-listed Adani bonds. Given legal expenses and time spent on the report, “we may come out ahead of breakeven,” Hindenburg states. While the Adani attack was “never justifiable” in terms of financial gain or personal safety, the company states, the work is what the company is “most proud of.”

We’ll see where this goes. Hindenburg questions SEBI’s authority over itself and Kingdon, since they’re both based in New York and don’t have Indian operations. One point SEBI is picking on is whether Hindenburg shorted securities in India, because it said in its report that it did not. However, Kingdon did, according to the watchdog.

I sympathize with short sellers. It’s certainly not an easy job.

If you want to put out positive research pumping up a company’s prospects, hey, no problem … Does it have to be accurate? True? No one’s likely to call you on it.

But a short seller is specifically attacking a company, and as Hindenburg noted in its initial Adani report, will almost certainly have short positions in the companies that it targets. It better have its facts straight because there will be blowback.

It was a gutsy call to take on Adani. Many of the fundamental questions surrounding the group have not been resolved. I’ll keep abreast of where the legal shenanigans lead.

But the murky circumstances surrounding one of the biggest corporate groups in India make it clear it is unwise to hold an individual Indian stock directly, unless you are certain its corporate governance is of the highest standard. Exchange-traded funds are the way to go in getting exposure to an exciting emerging market … that carries the normal sort of governance and political risk such markets often represent.