A transparency test for Adani

The Hindenburg-Adani fight will take some more time before one can say who won and who lost. The Adani group stocks fell steeply immediately after the Hindenburg report became public. But after that, there are indications that Adani group bulls are fighting a fierce battle against the bears in the Indian stock markets. Its follow-up public offering (FPO) too has managed to scrape through on the final day as expected, despite the lacklustre showing of the first two days.

I would have been surprised if the Adani FPO had not closed successfully. The Adani group has not grown this big without mastering the ability to muster funds and investors when needed. On the other hand, the pressure on equities has ensured that Gautam Adani dropped several rungs in the global rich hierarchy and lost a significant chunk of his notional wealth.

The long-term effect of the Hindenburg report could potentially raise the cost of funds when the Adani group next raises overseas debt. One lesson that the Hindenburg report has hammered home is that big business groups are best served by transparency in their business and financial dealings if they need to tap the overseas market for funds.

Much of the content of the Hindenburg report on the Adani group is not exactly new. Many of these questions had been raised from time to time. And despite its size, many analysts do not cover the group because they consider it too opaque. Mutual fund managers, too, do not have significant holdings in the Adani group stocks despite their performance in the past few years.

On the other hand, other institutional investors like LIC have shown their faith time and again in the group. They have gained because of the meteoric rise of Adani group stocks in the past few years. However, they also bore the brunt when the stocks fell after the report was widely disseminated. But institutional investors like LIC generally buy keeping in mind the long-term growth and other factors and, therefore, it is hard to pronounce that they have made a bad decision even if everything the Hindenburg report alleges is true.

The Hindenburg report’s importance lies in three things. One, it has put everything together meticulously in a single report, backed up its assertions with numbers and examples, and has asked extremely pointed questions to the Adani group management. Two, it has built up a reputation for being tenacious in uncovering enough dirt about the groups or companies it targets. The most famous case was its battle with Nikola, which led to the unceremonious exit of Nikola’s founder and executive chair Trevor Milton. Hindenburg founder Nathan Anderson has made a name in Wall Street for his ability to make contrarian bets even against well-known firms and winning many of them. Finally, Hindenburg typically puts its money where its mouth is — it takes short positions once it is convinced that a company’s stock or bond is highly overpriced. It has announced that it has taken a short bet against the Adani group by going after its bonds listed in the US and through derivatives.

The Adani group’s response to the Hindenburg report has been more bluster than hard action so far. It has come up with a 413-page reply, which contains little to convince a sceptic. The Adani group has also threatened legal action against Hindenburg. But there is a problem it faces if it chooses to take this step. Hindenburg is taking its short bet against Adani group bonds listed in the US and not the Adani group stocks in India. So filing a case in India against it will have limited effect. On the other hand, Hindenburg has dared the Adani group to file a case in the US — which would allow his firm to ask for a long list of documents that the Adani group may not want to make public.

While the Adani group’s biggest businesses are in India, it does have global linkages and a lot of the debt has been issued globally.

A report in The Economic Times suggests that the Adani group is planning to now rope in one of the big four auditors to go through its books. This is presumably because a clean chit by the biggest names in auditing will allow it to convince some big investors who have turned wary after the Hindenburg report.

Several decades ago, the biggest names in IT services in India realised that a global reputation for transparency is beneficial for doing business in developed countries, and also to attract big institutional investors of those countries. It is a lesson that big businesses in other sectors should also learn.

The writer is former editor of Business Today and Businessworld, and founder of ProsaicView, an editorial consultancy