How US short seller profited from triggering the Indian giant’s price plunge

New Delhi, Feb 03: Adani Group stocks have taken a beating on the bourses after New York-based Hindenburg Research made a litany of allegations in a report, including fraudulent transactions and share price manipulation at the Gautam Adani-led group.

In the report, Hindenburg called out the conglomerate's 'substantial debt', which includes pledging shares for loans; that Adani's brother Vinod 'manages a vast labyrinth of offshore shell entities' that move billions into group companies without required disclosure; and that its auditor 'hardly seems capable of complex audit work'.

However, Adani Group has dismissed the charges in its 413-page response on 30 January 2023 as lies, saying it complies with all laws and disclosure requirements.

While the Adani Group vs Hindenburg saga continues, a question that pops up in mind is whether this is the first time Hindenburg Research has made such allegations. Well, the answer is no. The Nathan Anderson-founded financial research firm, which has now taken on one of the world's richest men, had a track record of pointing out frauds in 17 companies in the past six years.

Who are Adani and Hidenburg?

Hindenburg is a research firm that gained notoriety in the financial world for its short selling reports and investigations. Hindenburg is known for publishing reports on publicly traded companies that it believes are overvalued or have engaged in fraudulent activities.

On the other hand, Adani Group is a multinational conglomerate based in India. The company was founded by Gautam Adani in 1988 and has since grown to become one of the largest corporations in India, with interests in ports, logistics, agribusiness, energy, and real estate. Until last week, Adani was the world's third-richest man but has dropped down the ranks to number 15 on the Forbes rich list after the rout in Adani group stocks.

Now, let us look at Hindenburg research's previous targets

Previous Hindenburg targets

So far, Hindenburg has mostly focused on American companies and have targeted 17 firms. In 2020, Hindenburg had released a report on US-based Nikola, a company in the electric-vehicle industry titled 'Nikola: How to Parlay An Ocean of Lies Into a Partnership With the Largest Auto OEM in America'. It was one of the well-known cases. The research claimed that Nikola's founder Trevor Milton, hungry to catch up with Tesla, made misleading claims to ink partnerships with top auto companies. Eventually, Nikola's shares dropped by 40 per cent following the report.

Hindenburg made similar short bets against other companies - Genius Brands -Entertainment company, Clover Health and Sri Lankan-born American and Canadian venture capitalist and engineer Chamath Palihapitiya, online betting operator DraftKings, electric car company Mullen Technologies, geothermal power plants company Ormat Technologies, and Chinese blockchain and crypto-mining firm SOS. Such short sellers are often criticised for unfairly pushing down stock prices with potentially unfounded allegations. But proponents also call them a healthy part of a stock market, keeping stock prices in check and preventing them from running too high.

How does Hindenburg make money?

Hindenburg focuses on activist short-selling (it is essentially betting on a company's stock falling). They make profits by identifying 'man-made disasters floating around in the market'. In particular, Hindenburg often look for situations where companies may have any combination of: Accounting irregularities, Bad actors in management or key service provider roles, Undisclosed related-party transactions, Illegal/unethical business or financial reporting practises and Undisclosed regulatory, product, or financial issues. In financial terms, the process is more complicated than betting on a share price rising, for which all you have to do is buy the stock and wait for it to appreciate.

In its Adani report, Hindenburg has openly said that it took a short position in Adani Group companies through bonds that trade in the US and other investments that trade outside India. So, as the Adani Group rout happens, Hindenburg gains.

While short selling reports can play a valuable role in uncovering fraudulent activities, they also carry the risk of spreading false information and causing harm to innocent investors. It remains to be seen how the Hindenburg vs. Adani Group case will play out, but it serves as a cautionary tale for the importance of verifying the information presented by research firms.