Howdy TaxAddicters!
Last month (January), an American company, Hindenburg Research LLC, published a report in which with significant accusations levied on the richest man in Indian, Mr. Gautam Adani.
As a result, within 3 days of the publication of this report, Adani group of companies had to bear the brunt of losses to the tune of $65 billion.
Obviously, you'd want to know about the contents of this report, now, let us understand this report in an epic way of a conversation between Krishna and Arjuna (Fictional Characters).
➽Arjuna (Fictional Character): Krishna, from the past 10 days, whenever I opened my mobile / laptop etc, there were lot of notifications / news regarding Gautham Adani and Hindenburg Report. what was the issue between Gautham Adani and Hindenburg? Please explain this in detailed.
➽Krishna (Fictional Character): Arjuna, Last month (January), an American company, Hindenburg Research LLC, published a report in which with significant accusations levied on the richest man in Indian, Mr. Gautam Adani.
As a result, within 3 days of the publication of this report, Adani group of companies had to bear the brunt of losses to the tune of $65 billion.
Obviously, you'd want to know about the contents of this report, but Arjuna, more interesting than that is the fact that Hindenburg has so much faith in its report that it has openly challenged the legal team of Adani companies, to file a legal case against Hindenburg if they can.
They are ready to fight a legal suit. Actually, if Hindenburg is proved wrong, Adani won't even need to file a case as an act of revenge, because if Hindenburg's predictions are proven wrong, they will have to bear heavy losses. This is because they are actively short-selling Adani stocks.
"Adani Group companies are continuing to face backlash after a report from Hindenburg Research. On 24th January, as soon as the Hindenburg report came to light, Adani Group had promptly refuted it. When Hindenburg published its report, they called it the Biggest Fraud in Corporate History."
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➽Arjuna (Fictional Character): Krishna, firstly tell me about Hindenburg company and for which purpose it was established?
➽Krishna (Fictional Character): Arjuna, Everyone knows Adani, at least in India. But many of you have heard the name Hindenburg Research for the first time. So let's get to know this company a bit.
This company was established in 2017, by Nathan Nate Anderson. He is a professional Chartered Financial Analyst and a Chartered Alternative Investment Analyst.
Those are the names of the professions. It might sound complicated so in short, you can think of him as a financial analyst.
Hindenburg Research carries out financial research. This company claims to carry out research on things that are not easy to find out. Uncovering hard-to-find information from a typical sources.
➽Arjuna (Fictional Character): Krishna, what is the background of Nathan Nate Anderson and how he named his company as Hindenburg?
➽Krishna (Fictional Character): Arjuna, Anderson completed his studies at the University of Connecticut. With a degree in International business. Initially, he worked as an ambulance driver in Israel. After that, he moved to America. He began his financial career by working in investment management companies.
When he founded the Hindenburg research company in 2017, he purposefully chose this name for the company. The name Hindenburg, is popular for a tragedy that took place in 1937. It's been decades since. There used to be an airship called Hindenburg. Not an aeroplane, it was an airship.
Today, airships are very rare, but they were common back then. One day, a Hindenburg airship caught on fire, killing 35 people. This is a famous disaster, because the photos of this tragedy were captured at the time.
Anderson compares the stock market disasters to this disaster from 1937 saying that all of them are manmade disasters. The purpose of his company, in his opinion, to prevent Hindenburg-type disasters from happening in the stock markets again. This is why, Arjuna, in addition to being a financial research company, it is an activist company as well.
They are engaged in activism for the benefit of the world. So that stock market disasters are prevented worldwide, they carry out their activism through short-selling.
➽Arjuna (Fictional Character): Krishna, what is Short-Selling and also explain how the term Short-Selling is related with Gautham Adani and Hindenburg?
➽Krishna (Fictional Character):
Short-Selling:
Arjuna, normally, you invest in a stock with the expectation that the stock price of the company would go up, and then you will make a profit. While Short-Selling, you invest with the expectation that the stock price of the company will fall, And then you will make a profit i.e. nothing but selling at the current prices (as you expect that the price will fall) and buying at the lower price as you had been expected previously.
Do you understand? Obviously, you'll want to do this when you expect, the stock price of the company to fall. When you think that a company is overvalued. I won't go into the exact process of short-selling, to keep things simple, but you would have understood one thing for sure, Short-Selling is also a way to make money. And Hindenburg doesn't deny doing this.
Short-Selling, Gautham Adani & Hindenburg:
Hindenburg claims that they carry out their financial research to expose the frauds committed by the companies, and the company that they expose, they would invest in it, by short-selling. They will bet on the company's stock falling. And then profit out of the fraud. That's an interesting business model. But this is risky.
Because when short-selling, there's no upper limit to your losses. Normally, when you invest in the stock of a company, hoping that its value would increase, suppose you invest ₹1,000 in Apple's stock, the most loss you could suffer is the value of the stock falling to zero. You lose your ₹1,000. Your maximum loss can be ₹1,000 only.
But while short-selling, you will bet on the value of the stock falling. But if it increases instead, it can increase infinitely.
It can go up by 100%, 200%, 300%, or even 1,000% If you have invested ₹1,000 in short selling, you can incur losses to the tune of ₹10,000. Or even ₹100,000, if the value keeps increasing. Short-selling is riskier than investing normally in the stock market.
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➽Arjuna (Fictional Character): Krishna, Now that I've understood this, then give me a brief about Gautham Adani Companies and his World's Richest Ranking positions as per Forbes?
➽Krishna (Fictional Character): Arjuna, In the Adani Group, there are 7 major stock-listed companies. Spread over a large number of sectors.
1. Adani Green Energy generates renewable energy.
2. Adani Enterprises is engaged in coal mining and trading.
3. Adani Transmission is engaged in Power Transmission.
4. Adani Total Gas for gas distribution.
5. Adani Power for coal-based power generation.
6. Adani Ports for ports. and
7. Adani Wilmar is a joint venture with Singapore's Wilmar International.
Up until recently, the operations of the Adani group weren't so large-scale or diversified They were mostly limited to Gujarat. But they saw exponential growth over the last few years. The growth was so rapid, that at one point,
Adani became the 3rd richest person in the world. His net worth reached $120 Billion! Of this $120 Billion, over $100 billion was created in the past 3 years.
It's another thing that ever since the Hindenburg report was published, he slipped to the 4th position, then to the 8th position, then to the 15th position, then to 17th position and then is at 21st position(as on Feb. 4th 2023 with net worth of $59 Billion).
➽Arjuna (Fictional Character): Krishna, Now that I've understood this, then what are the allegations against the Adani group in Hindenburg's Report?.
➽Krishna (Fictional Character): Arjuna, Come, let's understand the allegations against the Adani group. Now, let's see what this report is about.
This is a 106-page report. The title of the report is: In their opinion, this is the largest fraud in corporate history.
Hindenburg Research claims that they have invested more than 2 years in this research. They levy a large number of allegations against the Adani Group.
- Money Laundering,
- Stock Manipulation,
- Accounting Fraud,
- Corruption,
- Theft of Taxpayers' Funds and
- Creating Offshore-Shell Companies.
They claim that companies of the Adani Group have been the focus of 4 different government fraud investigations.
In this report, it is said that Gautam Adani's younger brother, Rajesh Adani, was accused by the Directorate of Revenue Intelligence in 2004-05, allegedly, he was arrested twice for forgery and tax fraud. But later, he was promoted to the Managing Director of the Adani Group.
The next accusation was on Gautam Adani's brother-in-law, Samir Vora. It is alleged that he was the ringleader of a diamond trading scam. He was later promoted to the Executive Director of Adani's Australia Division.
There's also an accusation against Gautam Adani's elder brother, Vinod Adani, allegedly, he went to various countries to create offshore shell companies and that he was engaged in money laundering.
In the report, Hindenburg identified 38 offshore shell companies in Mauritius. Controlled by Vinod Adani or his close associates. And other companies in several tax havens such as the Caribbean Islands. They report that several shell companies do not even have a website. Some have websites populated with only stock photos. There are no employees in the company. And not even proper addresses.
Hindenburg claims that they had filed several RTI applications with SEBI, to find out whether the offshore funds were a part of the investigations or not.
They claim that there's a Cyprus-based company, New Leaina Investment, at one point, 95% of its portfolio was the shares of Adani Green Energy. This company had invested $420 million in the shares of Adani Green Energy. And this company was operated by the company Amicorp incorporation services. And apparently, Amicorp had played a key role in the 1MDB international fraud scandal.
Where $4.5 billion was stolen from Malaysian taxpayers. They have cited several such examples in their report.
They claim that if Gautam Adani has done nothing wrong, he can answer their 88 questions.
➽Arjuna (Fictional Character): Krishna, after seeing this report then what was the reaction / response of Adani Group on this?
➽Krishna (Fictional Character): Arjuna, Now, let's see how the Adani Group responded to this report.
The first response was on 27th January. When the Adani Group published a presentation with the title Myths of Short Seller.
In response, they claim to have stable credit ratings, that the companies of the Adani Group meet various regulations as specified by the government. "The Adani Group published a lengthy response to Hindenburg's report over the weekend saying that it would pursue remedies to protect investors, before all appropriate authorities."
2 days before this, on 25th January, the CFO of the Adani Group, said that the timing of the report shows that it was published with malicious intentions. That they are trying to undermine the reputation of the Adani Group. And the follow-on public offering that they are about to pursue, this was an attempt to damage that.
"The timing of the report's publication clearly betrays a brazen, malafide intention to undermine Adani Group's reputation with the principal objective of damaging, the upcoming follow-on public offering from Adani Enterprise."
➽Arjuna (Fictional Character): Krishna, I heard about that Hindenburg also receive some threatening statements, is it true?
➽Krishna (Fictional Character): Yes Arjuna, On 26th January, the Head Legal Expert of the Group, threatened Hindenburg with legal actions. In response, Hindenburg Research says Bring it on! That they do not fear any legal actions.
➽Arjuna (Fictional Character): Krishna, One question arises here, why is Hindenburg Research so confident and Why do they have so much faith in themselves?
➽Krishna (Fictional Character): Arjuna, for clarification of your questions, We need to see their past track record. Before this, they levied accusations against several companies, and short-sold their stocks. Such as Nikola, Wins Finance, Genius Brands, China Metal Resources Utilization. In total, since being incorporated in 2017, they have targeted about 16 companies. And they short-sold the stock of these companies.
They published a similar report in September 2020 about Nikola. Claiming that the company was lying. After the report, the founder and executive chairman of Nikola, resigned from the company. And 2 years later, Nikola's shares fell 71%.
In May 2020, Hindenburg targeted China Metal Resources Utilization saying that there were several irregularities and wrongdoings in the company. That there were frauds.
After that, the shares of this company tanked by 90%. In June 2020, Hindenburg wrote about Genius Brands. Its share price was $6.86 per share. After the report, the price fell to $1.5 per share within 2 months.
In these cases, Hindenburg alleged some fraud or scam. And then launched a short attack. A Bloomberg report shows that about 30 companies targeted by Hindenburg on average, the day after the publication of the report, lost 15% of the value of the stock. And over the next 6 months, on average, their stocks fell by 26%. So, the track record of Hindenburg Research LLC is quite successful.
The stock of several companies targeted by Hindenburg crashed. And several underwent investigations as well. Even so, there's no doubt that short-selling is very risky. Especially since, if you take the example of Nikola, we found out later that Hindenburg had short-sold 43% of the stock. Short-selling almost half of a company's stock. That's a huge amount.
In case Hindenburg had to bear losses after their report on Nikola, that would have been a gigantic loss. In the case of Adani Group, we don't know the quantum of Hindenburg's short-selling. Perhaps, we'll get to know this in future.
➽Arjuna (Fictional Character): Krishna, is there any further responses from Adani Group after it's 1st response? and also what is Hindenburg's response on that?
➽Krishna (Fictional Character):
Adani Group's 2nd Response:
Arjuna, there was another response from Adani on 29th January. Hindenburg's 106-page report was countered with 413 pages. Adani publishes their report to counter Hindenburg's report.
They claim that there were selective and manipulative presentation in the public domain to set a false narrative. Additionally, they claim that the report undermines Indian institutions. And that it is an attack on India. Not on Adani, on India! An interesting response.
Adani claims that 65 questions out of the 88 are such that answers to which are publicly available. That if the financial statements are read carefully, and the stock exchange disclosures are checked, they can easily find the answers in public domain. And 18 of the questions, are about public shareholders and third parties, so that has nothing to do with Adani Group. And the remaining 5 questions, are baseless or based on imaginary fact patterns.
Hindenburg's response to Adani's 2nd response:
Hindenburg's response to Adani's response was that the Adani Group had not actually answered any questions. Hindenburg claims that in their response, Adani Group is merely claiming that they have the approval of the government regulatory bodies and that the data is publicly available but they haven't properly answered any questions.
In terms of patriotism, Hindenburg responded by saying that "Fraud Cannot Be Obfuscated By Nationalism Or A Belated Response That Ignores Every Key Allegation We Raised". They claim that Adani is using Nationalism as a shield. That Adani is trying to escape the questions.
Hindenburg goes on to say, "we believe India is a vibrant democracy and an emerging superpower with an exciting future." It's clear that Hindenburg is not doubting India's democracy or the fact of India being a superpower. In their own words, their sole target is Adani Group. And 60-year-old Mr Gautam Adani.
Overall, Hindenburg is so confident about its allegations that in the 4th point of their report, they said that even if we were to ignore their investigations, cited by Hindenburg in their report, And take the financials of the 7 key companies of the Adani Group at face value, even then, they are 85% overvalued.
➽Arjuna (Fictional Character): Krishna, the issue yet to be closed and the updates on this will come, then what is your suggestion to our TaxAddicters?
➽Krishna (Fictional Character): Arjuna, my suggestion to our TaxAddicters is, ever since the day of the publishing of this post, there have been major updates to this story.
Updates that hint at the Adani Group of Companies getting into deeper trouble.
2 Major Updates:
1st. Forbes accused Adani of buying his own shares, to inflate his stock price.
2nd. Credit Suisse (the French name for Switzerland), an influential investment bank, based in Switzerland, stated that from now, they will stop accepting Adani bonds as collateral. For any loan given out by the bank.
Basically, Credit Suisse has assigned a Zero Lending Value to Adani Group bonds. The same thing was said by City Group's Wealth Unit.
And 3rd. Adani Group cancelled their FPO. They said that since their share price was fluctuating so much, they cancelled the FPO on moral grounds.
In total, the losses borne by the Adani Group of Companies, amount to $86 Billion.
Arjuna, one thing is certain. This will play out as a win-lose situation in the near future. If Hindenburg's report is accurate, Hindenburg stands to gain and Adani stands to lose. But if Adani is right and this report is falsified, Adani stands to gain and Hindenburg will be the only one losing.
What do you think?
Do comment below.
Source: Dhruv Rathee yt
With this see you in the next post!
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