Adani Group Takes A Bad Break Due to Hindenburg Allegations

India today is the land of entrepreneurs, billionaires, engineers and technologists. It is today emerging as a superpower. However the country’s economy is backed by the broken state of its capital markets.

Indian Businessmen and politicians are increasingly facing criticisms. Recent among them is Adani Group. Mr. Gautam Adani is facing criticisms for accounting fraud, stock manipulation and money laundering at Adani Group that too taking place for decades.  Let us understand how Adani Group caught hold of these troubles.

ADANI GROUP-ONE OF THE LARGEST CONGLOMERATES IN INDIA

• Adani Group is the 2^nd largest conglomerate in India which is run by Mr. Gautam Shantilal Adani. The group has 7 key publicly listed equities with a collective market value of INR 17.8 trillion.
• It also includes Adani Private Companies and family trusts. Adani Group is involved in various business largely focused on infrastructure projects such as development of ports, mines, airports, data centers, power generation and power transmission.
• The 7 key Adani listed companies have seen their stock prices surging over the past 3 years and that too it has increased its ranking. Both Adani Enterprises and Adani Ports feature in India’s Nifty 50 Index and 6 of the Companies are included in MSCI India Index.

WHAT HINDENBURG RESEARCH SAY ABOUT ADANI GROUP?

• As per Hindenburg Report Adani Group has used offshore tax havens improperly. The Hindenburg Research says that the seven companies listed of the Adani Group have 85% downside on fundamental basis due to sky high valuations.
• The report also pointed out the debt of the company. Key Listed Adani Companies have taken on substantial debt including pledging shares of their inflated stock for loans, putting the entire group on precarious financial footing, 5 of 7 key listed companies have reported current ratios below 1, indicating near term liquidity pressure.8 out of 22 key roles are held by the family members of Gautam Adani.
• The Adani Group has previously been the focus of 4 major government fraud investigations which have alleged money laundering theft of taxpayer funds and corruption, totaling an estimated US $ 17 billion.
• Adani family members allegedly co-operated to create offshore shell entities in tax haven jurisdictions like Mauritius, the UAE, and Caribbean Islands, generating forged import/export documentation in an apparent effort to generate fake or illegitimate turnover and to siphon money from the listed companies.

EXTREME LEVERAGE SPELLS DANGER FOR CREDITORS

• From the Solvency Perspective multiple listed entities in the group are highly leveraged relatively to industry averages. Four out of Seven of these entities have negative cash flows. This indicates that the situation is worse.
• A company’s current ratio is a measure of liquid assets less near term liabilities. Five companies in the group have current ratios below 1.0, suggesting a heightened short term liquidity risk.

THE FACT SET

• Beyond debt held by individual Adani Group entities, the company’s promoter Group have pledged portions of their equity as collateral for loans. Equity Pledges are an unstable source of lending collateral because if the share prices drop the lender can make a collateral call.
• If no additional collateral is available the lender could require a forced liquidation of shares. Below chart shows equity share pledges by the promoter group entities for each of the listed companies.

FAMILY INVOLVED

• Adani Group is Largely Controlled by Family Members. The Chairman and Founder of Adani Group who is Mr. Gautam Shantilal Adani is a school dropout. He is also chairman of 6 out of 7 publicly listed entities. It has been accused that Members of Adani Family have played a major role in illegal activities which is taking place in the group.
• The scams include import export scams of diamonds, iron ore, coal and power equipment. Gautam Adani’s Brother Rajesh Adani helped plan a diamond trading scheme between 2004 to 2006 and he had been separately arrested on allegations of Customs Tax Evasion, Forging Documents and Illegal Imports.
• He currently serves as Managing Director of Adani Exports. Mr. Rajesh Adani has been arrested twice in the year 1999 and in 2010 for matters unrelated to diamond trading. The 1999 arrest was over allegations of customs tax evasion, forging import documentation and illegal coal imports.
• Whereas in the year 2010 arrest was linked to separate allegations of customs tax evasion and undervaluation of imported goods such as naphtha and petroleum products.
• Gautam Adani’s Brother in Law Mr. Samir Vora was allegedly a ringleader of the same diamond scam. Despite this he was promoted as Executive Director of Adani Australia. Samir Vora was alleged to have made multiple inaccurate statements to regulators during the investigation.
• Next is Mr. Vinod Adani, Elder brother of Mr. Gautam Adani was group executive and also accused in diamond and power equipment scams.

SEBI EXCHANGE RULES VIOLATION

• Publicly Listed companies in India are subject to rules that require all promoter holdings to be disclosed. These disclosures are required in order to satisfy Indian rules that publicly listed companies have a float of at least 25% that is not controlled by promoters.
• The minimum public float rules are intended to ensure a minimum level of liquidity, to reduce insider trading and market manipulation, and to minimize volatility.
• When Promoters disclose shareholding patterns it also allows investors to determine whether insiders have pledged their shares, an important gauge of the financial strength and or potential solvency risk of insider entities and individuals.
• Indian market observers have been aware that Indian promoters may use entities based in Mauritius and other offshore jurisdictions to evade these disclosure requirements and manipulate the share prices of their listed companies.
• Suspicions over the shareholding patterns in Adani listed companies held by a number of offshore funds has previously attracted questions from the media and Indian politicians, but deep dives into their shareholders have yet to be carried out.

 FOUR ADANI’S LISTED COMPANIES ARE GOING TO BE DELISTED

• Currently, 4 Adani listed companies are on the brink of India’s delisting threshold due to high disclosed promoter ownership. Adani Enterprises, Adani Transmission, Adani Power, and Adani Total Gas all report 72%+ of their shares held by insiders.
• Furthermore, Adani Wilmar, a new company with current insider ownership of 87.94%, must reduce its insider holdings to 75% by early 2025 to meet these requirements – a significant feat requiring the offloading of 12.94% of its current insider equity.

For Adani Group a large portion of public shareholders are funds based in the opaque jurisdiction of Mauritius.

Key Suspicious Mauritius Investors in Adani Stocks

The Monterosa Group

• 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.
• Alastair Guggenbühl-Even, Monterosa’s Chairman and CEO, has significant past connections with a notorious Indian fugitive diamond merchant, Jatin Rajnikant Mehta.
• He has served as director of Monterosa entities in India as far back as 2002. Mehta stands accused of illegally siphoning U.S. $1 billion from various Indian banks through standby letters of credit, then fleeing the country to a tax haven with no extradition treaty, per media reports. An Adani Group Related Party Entity Has Used Monterosa To Invest In Adani Companies, which suspects that Adani Group has misused funds.

Elara Capital Plc

• Jo Johnson, younger brother of former British Prime Minister Boris Johnson resigned as Non-Executive Director of UK Company Elara Capital. The UK-based investment firm has been under scrutiny for Adani Enterprises Case. The resignation was given on the same day when Mr. Adani cancelled his Follow on Public Offer.
• Elara Capital was founded by Raj Bhatt in the year 2002 as capital market business raising funds for Indian Corporates through Global Depository Receipts, Foreign Currency Convertible Bonds and London Stock Exchange Sub Market.
• Elara Asset Management Business came under spotlight after Hindenburg Research linked Mauritius Based funds run by the London Firm with Gautam Adani’s Group of Companies.
• Certain Revelations indicate that the convicted stockbroker Mr. Ketan Parekh have still links with the Adani Group as a close relative of his worked at Elara Capital.
• Elara Capital is also known to have close relationship with the chartered accountant Dharmesh Doshi, who is associate of Ketan Parekh who absconded from India in the year 2002.

Stock Parking Entities

• The stock parking entities bought and sold stock in the market, sometimes in a synchronized manner, according to exchange data and disclosures in the annual reports of Adani listed companies.
• Using the top ten shareholder disclosures by Adani listed companies, which display granular detail on purchase and sale activities of these shareholders, it was analyzed the activity of the stock parking entities – Monterosa, Elara, and New Leaina– and also constructed a wider dataset which included four other Mauritius shareholders with portfolios having suspiciously concentrated holdings in Adani stocks.
• These suspicious offshore entities are EM Resurgent Fund, Asia Investment Corporation, Emerging India Focus, and Capital Trade and Investment.
• SEBI has investigated more than 90 entities or individuals, and sanctioned or reached financial settlements with at least 70 of those, including Adani promoters, for pumping Adani Enterprises stock – at some points in excess of 100%, according to SEBI documentation available online.
• The alleged manipulation occurred between 1999 and 2005. Adani Group promoter entities initially received bans for their role in market manipulation, but those were later reduced to negotiated settlement payments. Other regulatory issues have slowed or been stonewalled for decades.

Adani Group’s Response:

Discredited Allegations

• There are multiple false allegations narratives created regarding diamond exports whose matters were already closed by Appellate Tribunal in the favor of Adani Group. This decision was further confirmed by Supreme Court but Hindenburg Report has deliberately concealed the matter.

Manipulated Narrative around unrelated third Party entities

• Shares of listed companies on Indian Stock Exchange are traded on regular basis. The listed entities does not have control over who buys, owns or sells shares.
• Hindenburg has raised questions over the offer for sale undertaken by Adani Green Energy Limited in 2019 while it has ignored the OFS procedures in India and is regulated process which is implemented through an automated order book matching process on the platform of stock exchange

Misleading Claims regarding offshore Entities

• Adani Group of Entities have said that Hindenburg Allegations are reckless without understanding Indian laws around the related parties and related transactions.

 Conclusion

• Adani Group has claimed that they have successfully executed an industry expansion plan over past The companies have consistently de-levered with portfolio net debt to EBITDA ratio coming down from 7.6x to 3.2x.
• Adani has developed deep relationships with the banks and institutions like JP Morgan, Bank of America, Merrill Lynch, Citi Credit Suisse, UBS, BNP Paribas, Deutsche Bank, Barclays and many others. This has helped them for raising funds.
• Adani Group also said that they have centralized ERP Governance Mechanism, Periodic Internal and External Reviews of various process, issuing Corporate Guidelines and ensuring their adherence. Adani Business Excellence Team is a centralized team handling accounting and financial controls. These processes have received six sigma and ISO awards.
• Adani Group companies have a very strong audit process to prevent any deviations from regulatory obligations and ensure highest legal standards. The Audit Committee of each of the listed verticals comprises 100% Independent Directors.
• Gautam Adani has assured that Adani Group is in complete compliance and all applicable laws and regulations will continue to retain rights of the stakeholders.