Unmasking the Mirage - Hindenburg's Blow to Adani's Stock and the Unfolding Truth

Abstract

The recent development within the country and more importantly the flow of funds to the government in the contemporary world is primarily due to the IT service sector. The government has focused on increasing investments on IT firms and has supported the development of a culture of entrepreneurship. This strategic focus has in particular contributed to a massive boost in employment rates. Higher employment not only incurs more revenue circulation but also plays a significant part in the development of a country and thus, to the National Income. Nevertheless, with the progress of economic development, there are various risks such as fraud, manipulation, and excessive related parties' transactions. One of the most recent and eye-opening cases is the Adani Group that became the subject of discussion after the accusations made by Hindenburg Research. The case involves a report that was published early in 2023 which indicted the Adani Group of several cases of fraud. Consequently, of these allegations the stock value of the Adani Group plummeted, which showed the gravity of the situation. This has turned into a major showdown between the Adani Group and Hindenburg Research capturing the interest of not only the financial markets but also the regulatory authorities. As much as this paper aims to discuss the allegations made by Hindenburg Research, it is important to look at the specific accusations made against the Adani Group. Consequently, by analyzing these allegations within the Indian context, the paper seeks to give an overview of the legal and financial aspects of the case. This analysis will not only help in understanding the veracity of the said allegations, but also the implications that this has for corporate governance and regulation in India at large. 1

Keywords: Government Investment, Financial Irregularities, Adani Group, Hindenburg Research, Stock Manipulation

Introduction

In the business world, the famous quote by Warren Buffet, 'In the business world, the rearview mirror is always clearer than the windshield' is a very appropriate statement that shows that it is easier to analyse past events and their impact than trying to predict the future. This cannot be more relevant whenever one is studying the constantly shifting and competitively growing economy of India. India is one of the biggest and fastest growing economies globally and across the sectors has emerged as a progressively resilient as well as robust market.

There are two methods of measuring GDP commonly, the first being on the basis of market exchange rates and the second on the basis of purchasing power parity, in terms of the former India ranks fifth in the world and in terms of the latter it ranks third according to the IMF. It has a low debt-to-GDP ratio and impressive gross domestic product nominal of USD 3 trillion. 73 trillion. A per capita income of $2,612 paints a picture of a pluralistic economy of India that has the opportunities and but also the challenges of the fastest growing economy across the continents of the world. 2

The IT Industry is one of the wheels that support India's economic chariot, it is one of the industries that handle a significant percentage of the country's GDP. Today India has proved to be one among the top IT service exporting nations and this proves the advanced technologies and talented human resources. According to the estimate made by World Computer Bureau, in 2023, the contribution of the IT sector to the Indian GDP is expected to be about 7.5% and it is considering as important part of economic structure in the nation. The IT industry in India is therefore diverse in that it embraces many types of business ventures, both services oriented, and manufacturing oriented businesses that offer solutions within and outside India. 3

However, the current face of the India industry can be gazed in the Adani Group which is an Indian multinational business conglomerate based in Ahmedabad. With Gautam Adani at its head, the group has continued to spread its wings across newer domains such as energy,

logistics, and food processing. It is not only emphasising the diverse business model of the group but also displaying its impact on the Indian economy.

Hindenburg Research is an American investment research company which was initially launched in 2017 by Nathan 'Nate' Anderson and mainly focuses in releasing investigative reports about several companies. This is because the firm takes a lot of pride in the ability to obtain information that might not be easy to find in more conventional means and this primarily deals with issues concerning fraud and other types of misconduct. Hindenburg Research releases all these reports on its website, and through such announcements, a company's operating practices are put under intense scrutiny, causing massive reactions within the market. 4

One of Hindenburg's significant examples of entailing a company was the case when the firm released a report about the Indian conglomerate - Adani Group. This report had some very damning findings - allegations of stock manipulation, fraudulent audits, and many other illegal activities. In response to the severe critique, the market responded rapidly and intensely; within three days of the publication, Adani's Group of companies suffered nearly $65 billion of lost value. Hindenburg Research was unrelenting and stated they would be prepared to defend themselves and their work with the help of the court against the legal team of the Adani Group.

Previously in last year, Hindenburg Research published information revealing its short exposure to Adani companies through bonds floated in the United States and non-India listed derivatives. Hindenburg Report provided evidence that Adani has used tax haven and questioned the lofty debts of the company. Subsequently, the Adani Group refuted the claims by categorizing the report as unfounded and terming the allegations as hearsay. In response to the report, the Adani Group quickly dismissed it as baseless, while characterizing the claims as 'hearsay. 5

Functioning of Hindenburg

Hindenburg research is a company that deals in exposing frauds and manipulations of stocks which they classify under what they call man-made disasters. This company exposes companies in a unique and relentless approach that separates it from any other company of its kind. Hindenburg research also notes that it employs basic methods of research while investing, however, its best research originates from looking for substantive information from unconventional avenues. In other words, it goes beyond the regular productions of balance sheets, trading data, and other financial features by striving to acquire information that is often hard to find. They use a complex and very scrupulous analytical approach where they study every aspect of a company's activity, its financial reports, and outside communication searching for signs of inefficiency and abuse.

For instance, Hindenburg Research has two major areas of concentration which examine between four to six outlined red flags within corporations. These include analysing balance sheets for discrepancies and any indications of a disguised fraudulent reporting system that results in the provision of erroneous details regarding the performance of a company. It scrutinize experience certificates, employment references, credit histories and any other information that may reveal personally unethical or irresponsible officials, origination from the background of executives and other personnel who may previously have been implicated in fraudulent activities. It actively seeks out undisclosed transactions between the company and parties connected to its insiders, in particular its executives or members of the board of directors, for often these interactions raise the possibility of conflicts of interest or fraud.

The company also monitors for any indications that it may be undertaking unlawful or scandalous business actions or failing to disclose losses or other facts critical to investors that could infect the enterprise with extreme penalties. Last but not least, they look for holes that a particular company might have, including, but not limited to, regulatory proceedings against the company, a product that has serious flaws which the public is still unaware of, and financial issues that have not come to light yet as they can affect the company's stock astonishingly when unveiled. 6

Through identifying and addressing such important areas of concern, Hindenburg Research provides investors with an opportunity to be shielded from financial losses, facilitated by concealed risks and fraud, for the enhancement of corporate disclosure and stock market integrity. Their work then potentially betrays the lapses in business and investment research that must be invoked to explain how fraudulent practices could be pursued for years before the scam finally collapses.

Anderson shown how similar the calamity of the stock market is like the one that befallen the Hindenburg air ship in 1937. The infamous Hindenburg incident which was a terrible Fire lead to the killing of about 35 people and has since earned itself the title of huge failures. Anderson equates this to the falls in share price of a company, stressing on the fact that most falls are sudden, abrupt and may be very fatal. He points out that Hindenburg Research, the company at the centre of the article, fits the activist role since it becomes an investor to uncover and combat frauds. This view is not isolated to disclosure but is closely tied to the financial management of the company, which, as will be discussed in the following section, includes short selling. 7

Short selling is commonly referred to as 'shorting' or 'going short' and is considered a high risk, high reward investment method utilized by discerning traders. Short selling is different from traditional trading in which the trader's main aim is to purchase the asset at a cheaper price and then sell it when the prices are higher, it involves selling stocks that are not owned by the trader with the belief that the price of the respective stock shall decline. Trader buys the stock on margin and sells it at a higher price to the public, aims to purchase the same at a lower price with maximum profit difference. This strategy is based on the presumption that a stock is overpriced and needs a wakeup call. For instance, if a trader finds it suitable to trade at a specific share that is at 200 rupees and the trader expects it to reduce to 180 rupees the trader sells the stock at 200 rupees to other traders. After the price lowers to 180 rupees each, they immediately buy it back and get a profit of 20 rupees per share. This kind of trading is made possible by an MIS Margin intraday settlement, account. In India the market regulator SEBI or Securities and Exchange Board of India allowed short selling, but only for those trades which

are delivery-based trade and any such trade which is done by short selling has to be squared off on the same day in the market.

Hindenburg Research is a financial research company that is focused on a short selling strategy in an effort to report fraud from different organizations. As its modus operandi they engage in detailed financial analysis and place a derivative bet on the carry-on dive of the exposed company share price. However this method can be quite lucrative, it also implies a rather high level of risk at the same time. The main disadvantage of short selling is that this type of trading entails much higher risks, as all losses are not necessarily limited by the amount of funds that has been invested in a security as it is in case of classical trading. If the stock price rises instead of falling, the losses that can be incurred are huge without a change of heart. For instance, where a trader has sold 100 shares of a stock at a price that he believes will decline, but it so happens that the price rises instead, the trader faces potentially unlimited losses, since there is no cap to the upside of a particular share price. The only exceptional case is when an upper circuit breaker occurs as there are no sellers to meet buyers' demands. However, if such a situation is not the case, then one can realize an infinite amount of money, but the financial risk being in short sale is very large, which speaks to high stakes for this type of trading.

Framework of Short Selling in India

Short selling is legal and allowed in today's world and India in particular. It was not always so as these paper aims to establish when analysing a few selected educational institutions. Short selling was considered unlawful from 2001 to 2008 because of cases of insider trading which were alleged to have instigated a massive crash on most stocks. The ban was a preventative measure used by the Indian regulators to delist the US securities from its market for keeping the market steady during the period of uncertainty in order to protect the interest of the investors. 8

However, Indian regulators decided this year to reopen the short selling but with conditions to curb the hazards that could occur. These new regulations involved control of day trading by institutional investors, rule that requires investors to report short sales, and creation of an

exclusive short selling platform. They were meant, inter alia, to improve transparency and avoid specific market abuses.

During the contraction of the economy owing to the COVID-19 outbreak in March and October, 2020, Indian regulators have again closed the short selling temporarily. This decision was taken as part of emergency risk management measure when the market was facing an unprecedented global turmoil.

Only domestic institutional investors such as mutual funds, FIIs, banks and insurance companies, are permitted to short sell, assuming that the appropriate derivative products for the involved securities are available. short sale and if the stock is a short sale or not to be disclosed at the time of the transaction, apart from meeting their ability to borrow the shares to their broker. While, institutional investors are restricted from releasing this information while the market is open and this information can be released by retail investor by the close of the market.

Notably, the naked short selling practice is considered unlawful within the territory of India.

The current SL/B regime is implemented through the CC/CH of the securities market or through the stock exchanges. By controlling the ways through which investors can leverage the available demand for securities this system is suboptimal. It has been mooted to improve this system by the employment of Approved Intermediaries (AISs) and initially the banks shall be acting as the custodians. This timid strategy is being employed in a bid to achieve a sound and secure environment for lending and/ or borrowing institutions. 9

Most of the companies are open to FPIs and FIIs but, short selling is prohibited for FPIs and FIIs by the regulatory rules and laws. This restriction is thus meant to mitigate any possible problems to keep the efficiency of the market uninterrupted and curb any activities that may inhibit the efficiency of the short selling practices in the Indian financial markets.

The external actors still partake in trade within India through different incorporation or organizations that are still legal on the conductance of such mechanisms. However, it should be noted these measures do not directly aim at the essence of problem but are only focused on

direct intermediaries. Therefore, it is the original problem that is still unresolved. From crosssectional comparison of securities markets, it can be noted that the markets do not directly regulate and control lending and borrowing activities. This is because OTC transactions are the usual practice in most of these transactions and thus the involvement of a third party like a stockbroker is compelled. Thus, instead of being owners or operators, the custodians and depositors are those who provide management and running of these lending and borrowing institutions. In the event that India opts for this framework, any resulting short-selling regulations require implementation together with this new scheme.

In India, there exist many other corporate organizations which have not been restricted to perform trading with foreign entities. These regulations are primarily directed at controlling various activities of direct intermediate parties, without addressing roots of the trading activity. Tom is therefore commercially correct in positing that the issue of unauthorized trading by foreign entities is not adequately addressed. Globally, the idea of how to govern securities markets is that of restraining interference with the lending/borrowing processes. Such transactions occur at OTC, and thus are controlled by custodians and depositors of the lending and borrowing institutions. Would India have to undertake a system of better international model, it would have a like need to introduced rules regarding short selling for better over bearing regulation. 10

However, attempts to regulate the said activities remain a challenge; foreign entities are able to circumvent the forbidden restrictions of trading directly with India through the use of any corporation or organization which is allowed to trade directly with the country. This has not fully addressed the problem since the current regulations work with the current trading and only pays attention to the direct intermediary and does not probe into the sources of the trading. In other countries, it is not feasible for the securities markets to directly deal with the over-thecounter lending and borrowing processes, which is why they are not required to regulate these processes. It can usually be attributed to the custodians and depositors who manage the lending and borrowing processes of the respective business. Accordingly, any similar system that has to be incorporated for India there would be need for the regulation to fillip short selling provisions as part of this new framework.

Foreign entities continue engaging in trading, specifically within India, through associating with corporations or organizations that are still formally authorized to trade despite existing regulations. These regulations are aimed at direct intermediaries only though they do not address the mater appropriately. Therefore, the central problem persists, as the two characters further the plot but do not address the underlying problem. Therefore, while in the securities markets outright purchases and sales of securities take place, lending and borrowing activities per se are not controlled and do occur OTC. However, these are managed by non-executive custodians and depositors themselves and not by these lending and borrowing institutions. If India were to introduce such a scheme at some point in the future, it will be important to do so in conjunction with short-selling regulations as these would need to be complementary for all to operate in a coherent and effective manner. 11

Initial Impact on Adani by Hindenburg Report

It is noteworthy that the Hindenburg report launched a substantial blow to the Adani Group and led to the decrease in the company's market capitalization that accounts for $100 billion. This financial shock relegated Gautam Adani from being the third wealthiest person in the world in asset terms back to the 20s. The fact of the report raised many concerns and speculations about the role and maybe control that now Indian Prime Minister Narendra Modi has had on the exponential growth of the Adani Group. There are speculations that struggling together and coming from Gujarat, India, there is a close relation between both that showed positive impacts to get them to where they are today. 12

In response to these allegations, Adani categorically denied any outside influences meddling with his business. He assured people that all its contracts and associations of the Adani Group have been orally and in the public domain. Adani in his defence said that there was no wrong doing by his company to have received political patronage since the success of his business is as a result of business operation prowess. He claimed that he is an independent businessman who has made his fortune despite being the son of a footballer.

In response to the report, Adani described it as 'merely an expansion of the same unfeasible Short Attack from Hindenburg Research'. Jugeshinder Singh, Chief Financial Officer of Adani

Enterprises, also denied the report as baseless and was an act of extremism by Hindenburg. Criticizing the report, Singh said it was an incorrect assembly of half-truths: misinformation from decades ago that was still considered as unverified, slanderous, and thoroughly debunked by India's Supreme Court. This was typical Singh's mentality of dismissing the report and assuring the stakeholders that there are no rot in the Adani Group business. 13

Since Hindenburg was not the only investigative industry that had delved into the activities of the Adani Group of companies. As the House may be aware, many RTI applications had been made against the Adani entities. Most of these applications were aimed at the Adani group and several other off-shore companies including Elara, Monterosa Investment Holdings, new Leina, and other related companies operational in Mauritius. These offshore entities had been under scrutiny for over eighteen months before the leaks rocked the world. In view of this it is likely that Indian authorities, headed by the political, did not consider the Adani Group as a viable entity they could support or a financially feasible company they could accept.

It thus increases the chances of directors submitting RTIs to SEBI to report manipulative trading activity. This involves Ketan Parekh, a former stock market manipulator who was accused of being involved in a number of stock scandals including securities fraud, involving Dharmesh Doshi, a fugitive accountant, and Samir Arora, who is a brother-in-law to Gautam Adani. Moreover, members of the Adani family were also accused of wrongdoing in the share's fraud scam. This also involves Vinod Adani as the elder brother to Gautam Adani and Rajesh Adani as his young brother.

Majority of the investigations within India was headed by the Director of Revenue Intelligence (DRI). Such serious cases as financial and regulatory misconduct by the Adani Group and its related companies were analysed with the active participation of the DRI. The findings of this wide-ranging analysis indicate the vast lengths that different Indian authorities have gone to monitor, investigate, and seek to contain the vast network of financial and regulatory concerns related to the Adani Group and its associated entities.

Within the report, a number of suspicious related to the Adani Group are pointed, and the Group's managerial effectiveness and financial integrity are called into question. One area of concern is the high dependency on related parties' transactions and activities. Namely, the

report cites numerous transactions while involving the Adani Group with different organizations including Monterosa Investment Holdings which reportedly has stakes of over INR 360 billion invested in the different listed companies of the Adani's group. Another company involved in the case is Elara, an offshore firm that is said to be owning about $3 billion worth of Adani stocks. The scope of these transactions is massive; for instance, seven key listed entities in the Adani Group have a total of 578 subsidiaries and under the relatedparty transactions rule, engaged in 6,025 transactions in the fiscal year 2022. The business implications of this practice are clear: it prompts questions regarding the quality of these transactions, as well as the orientation of the processes to the common good of all shareholders. 14

Furthermore, the report also highlights that there is a high turnover of employees occupying strategic accounting and reporting roles. It would be interesting to know that Adani Enterprises being a reputed organization had witnessed having seen 5 CFOs in next eight years. Thus, the switching of CEOs in this particular function often can be a sign of discontent or instability of financial management in the company; which inevitably can hamper the company's financial health and strategic financial plan.

Even the audits conducted by Adani are also placed under scrutiny with regards to credibility. Out of these, Adani Enterprises has one of the current independent auditors such as Shah Dhandaria audit company, which is a very small audit firm and they have no well-designed company website. It was apparent that this firm consists of only four partners and eleven employees and this information will obviously make one to doubt its ability to adequately audit such a large and complex conglomerate. It is reasonable to view the selection of such a small firm in the company's auditing process as unfeasible, considering the possibility of inefficiencies in the audit process due to the lack of firm size.

Impact of the Report and Revival of Adani Group

This means that even if the Report contained actual facts or false information it has done the job of causing harm by merely being released to the public. This led to a disastrous collapse of the Adani Group shares in the market with losses touching $ 140 billion in the wake of the report. Such a sudden twist greatly affected the confidence of the investors as well as inflated Hindenburg Research's profits via short selling. As such, the economic power of Adani dropped from becoming the Third wealthiest man worldwide to the Twenty-Third in 2022. Earlier this year, the Hindenburg Research published a report claiming fraud stating that Adani's conglomerate inflated its values and deceives foreign investors which as per the Hurun Global Rich List 2023 the business tycoon's net worth erodes by around 300 crores each week after this report. 15

The attack by a short seller forced the Adani Group to reevaluate its expansion goals and needs, especially after accumulating arguably the largest credit pile in India to fund new endeavours. Adani, known to be in the close contact of Modi and contributing to his vision of making a new India has been benefited as their group firms emerged as colossal since the Modi regime came into power. However, this growth trajectory was put into test when the group considered a new direction in the operation by seeking to diversify into sectors such as aluminium, steel, and roads. It was rumoured in March by Bloomberg News that sources with knowledge of the groups internal plans had revealed that it had withdrawn from a strategic level.

In space of a month poor Adani saw its days evaporate and it entered a period when it initiated heavy losses. Adani Enterprises plunged 5%, the most in over five years, and all of the six listed Adani companies closed at five-month or one-year lows. States Rohan Shah, head technical analyst at Stoxbox, that the Adani Group's market capitalization was closer to ₹25 lakh crore on the day of its respective peak. In February 24, 2023, this market value was fallen by more than 71% and created the loss above ₹17. 8 lakh crore. The latter made it through the list of the most affected; Adani Total Gas plunged by nearly 81%; Adani Green; Adani Transmission dropped about 74%. 5% and 74%, respectively. The impact was not limited to

only the power division but also affected the Adani Enterprises Limited, the flagship company, with the share price declining by 62%. 16

After the publication of the critical report by the short seller, the Adani Group faced some problems. Nevertheless, these adversities did not deter Gautam Adani to continue with his mission to rebuild and solidify the company. Adani Enterprises Ltd (AEL), spearheaded by him, denied all accusations made by the Anderson company and remained operational. More recently, the Adani family tactically sold stakes owned by the Group CFO Jugeshinder 'Robbie' Singh for $1.87 billion for a 10% stake from global private equity firm GQG Partners. Moreover, the group has received board approvals for a further $4 billion funding within the next one year, depicting the strong financial planning of the group.

In the future, the Adani Group is set for a major task of rebuilding its companies. One such effort includes ₹12,500 crore equity fundraising scheme, which has been prominently set out by AEL with the help of its subsidiary, ANIL, in green hydrogen. This programme focuses on creating an integrated system that includes green hydrogen production, downstream products including ammonia and urea, and the production of related supply chain components including wind turbines, batteries, and electrolysers. Further, the group is in the process of diversifying its focus from business segments that are more traditional and heavily reliant on capital intensive industries to consumer-focused sectors like airports, energy and gas distribution and real estate in its future growth strategy. 17

Nevertheless, over the last few years, the group has faced some challenges, for instance, the scrutiny of SEBI following the Supreme Court's expert committee probe into the Adani stock crash, however, the group has been able to continue its expansion efforts globally during the Hindenburg crisis. Credit for such resilience and development has been placed on the door step of the management team's allegiance to Gautam Adani. This devotion has rightfully made them the pride and joy of the company as they rightfully call themselves the company's greatest asset. In the future, the CFO has proposed that the group is going to operate with 14-15 companies instead of the current 10 companies by 2033 which is a part of the strategic direction

to cut down the number of companies it operates with in order to increase the operational intensity.

Conclusion

The recent confrontation between Adani and Hindenburg should be seen as an important reminder that the corporate world is not always as simple and transparent as it seems, and there are always some hidden activities that are difficult to regulate, despite the fact that they are required to be in compliance with the regulatory norms set by SEBI, FDI, and CCI regulations. Such examples show that simple monitoring cannot prevent fraudulent and other illegal actions, so one has to look for additional ways. In light of the recent events, one cannot deny that many of the allegations made by Hindenburg Research are still unproven and that there is no solid evidence to substantiate them; however, the journalists believe that some of the accusations were perhaps overstated for the sake of effect.

Furthermore, it also highlights the current rules and regulations in India for short selling. Though legal, it becomes problematic when some individuals use it to slander a company or bet on their failures. Spite of all this, the extent of harm done by the short selling to the goodwill of a company can be massive and therefore calls for elaborate legislation on short selling and other related practice.

Therefore, as stakeholders, investors have to ensure they closely inspect the products and services companies offer in a bid to avoid such losses. Force majeure is evidenced by the Hindenburg report where publication of the report was out of the investor's control and led to severe damage that cannot be compensated. Therefore, complaint resolution and effective investor protection systems should be put in place.

Moreover, this event provokes questions regarding ethics and governance of large companies. This is an indication that market regulators need to step up their game in protecting investors and also ensuring that they conduct proper oversight on organizations. It is for these reasons that transparency, accountability, and ethical corporate conduct are central to building trust and maintaining investors' confidence in the international arena. In the end, whether or not accusations are true, this event is a good example of how investigation reports can significantly influence the market and investors' feelings.