Analysing Adani’s Detailed Response to Hindenburg’s Allegations: Will It Satisfy Investors And Salvage FPO?

After short-seller Hindenburg’s report caused a massive controversy that led to the Adani Group’s stocks losing nearly $ 48 billion in value, the conglomerate on Sunday (Jan 29) released a detailed response to Hindenburg’s allegations.

The report by Hindenburg was released just before Adani’s Follow on Public Offer (FPO), and the result was evident – the FPO has received just one per cent subscription, with the retail portion being subscribed to two per cent.

The FPO, the largest ever in India, aims to raise Rs 20,000 crores from investors. However, the response so far has been muted.

Institutions like mutual funds have not participated in the FPO, which could be a sign of caution among these investors. Hence, the investor acceptance of Adani Group’s explanations would be the key to its FPO’s success over the next two days.

How Has the Adani Group Responded to Hindenburg’s Allegations?

While Adani Group attempts to address most of the specific allegations made by Hindenburg, it begins by saying that the short seller's report must not be construed as an attack on the conglomerate but "a calculated attack on India, the independence, integrity and quality of Indian institutions, and the growth story and ambition of India".

“Hindenburg’s conduct is nothing short of a calculated securities fraud under applicable law,” Adani Group said in its response

In its previous official statement, Hindenburg had asked Adani to initiate legal proceedings against Hindenburg in the US. But so far, there have been no reports of legal action against Hindenburg. The Adani response said that not much is known about Hindenburg, its employees, its source of funding, and other details.

The Hindenburg report had raised 88 issues that the Adani group has answered in its 414-page response.

The Hindenburg report had several serious allegations, some of which included involvement with stock manipulator Ketan Parekh, shareholders, siphoning off funds from listed entities, use of shell companies, issues around financial reporting, and lack of disclosures.

Some of these allegations only highlighted past investigations of the Adani group’s activities.

Some allegations appear superficial and circumstantial in nature and are likely to have been levelled to highlight negatives. But other allegations were quite serious.

Adani’s Response Regarding its Public Shareholders

The Adani group’s shareholding has been a significant point of discussion over the past year as its stocks created immense wealth for shareholders. Media outlets had questioned the fact that investment funds that held a major part of the float were offshore companies. These funds had invested all of their assets under management only into Adani group’s stock.

Hindenburg claimed it had spoken to ex-employees at the company that ran one of the funds, who said that “Adani controls the shares”. Predictably, the Adani group has said that it is not related to any of these entities and that it is not legally required to keep any detailed information about its shareholders under Indian law.

Adani’s Response on Relations with Amircorp and Fugitives

Hindenburg alleged that Adani group had relations with Amicorp, a company that partook in shady financial activities and was involved in the $ 4.5 billion 1MDB scandal in Malaysia.

In its response, Adani group has said that Amicorp is a provider of secretarial services and is merely one of its many clients.

Hindenburg had questioned Gautam Adani’s elder brother Vinod Adani’s involvement with alleged market manipulator fugitive chartered accountant Dharmesh Doshi. The Adani group has said that the transactions were in the course of business, under all applicable laws and have been disclosed. It has also been said Vinod Adani doesn’t hold any managerial positions within the group or look after day-to-day affairs.

In multiple responses to Hindenburg’s other allegations of a large number of related party transactions and payments by listed entities to private Adani companies, the group said that the transactions were made on an arms-length basis, under the applicable laws, and were fully disclosed in public.

The group also said it had received a clean chit in the investigations Hindenburg had cited in its report.

What Happens if the FPO Fails?

While the Adani group has responded to Hindenburg, whether investors are satisfied with these responses remains to be seen.

Even before the FPO, Adani group was not a part of portfolios of mutual funds despite being a part of indices and one of the largest conglomerates in India. One of the reasons for this is the low availability of float and its relatively high valuation when measured in terms of sales or earnings multiples.

In an interview, the group’s chief financial officer Jugeshinder Singh said that the company would postpone its expansion plans by 6 to 9 months in case the FPO is unsuccessful.

Of the Rs 20,000 crores the group is looking to raise, around Rs 11,000 crores were to be invested in new businesses, while Rs 4165 crores were to be used to repay borrowings, and the balance would be used for general corporate purposes. The stock was last trading at a discount to the FPO price due to the decline in stock price after the Hindenburg report came out. Yet, so far, no changes have been made to the FPO price.

Also Read: What Hindenburg Report Could Mean For Adani Group