Prof D. Mukhopadhyay, Dr. Kamal Agarwal
Adani Enterprises(AE), one of the world’s gigantic business houses, faced its stock price crash to an unprecedented magnitude of 50 per cent in recent past. Gautam Adani, the founder and CEO, AE had built his corporate empire of a huge quantum of market capitalization during a period less than a decade. On January 24, 2023, Hindenburg Research LLC, an investment research firm with a focus on investment activist short selling entity founded by Nathan Anderson in 2017 headquartered at New York City, USA, published a report alleging that AE is pulling off the “largest con in corporate history”. It claimed that AE is involved in stock manipulation, accounting fraud, irregularities in financial reporting , improper use of tax havens and money laundering activities. The report was critical in reasoning the spectacular growth in wealth creation by stock price manipulation and practising financial frauds. Hindenburg raised the issues of accounting malpractices at Adani’s Australian Operations, which include the Carmichael Rail. AE responded to the reported allegations in no time by issuing statements that Hindenburg Report is an attempt to a “calculated attack on India and the growth story and ambition of India”.
The 107 Pages Hindenburg Report published on 24th January, 2023 was responded with 413 pages clarifications by AE. However, Hindenburg expressed its disagreements with the clarifications offered by AE. According to the available information, Hindenburg business concentrates on identifying ‘bad firms’, investing to profit generated from crashed shares prices and publishing a negative report about the concerned firms. Hindenburg’s action seems to be controversial as the commercial success of it, in all probability, appears to be the function of short selling operations and if it is so , it may attract the questions of business ethics and legality of the modus operandi of its business . The main objectives of the short sellers in general concentrates on detecting and exposing irregularities in financial reporting and accounting frauds of the wealthy firms across within a short period of time. Hindenburg so far hit 17 companies across before it hit AE in recent past. The short sellers involved in having a “short exposure” to the company’s stocks and bonds aiming at deriving financial benefits immediately after the stock price crashes. Hindenburg asserts in the context of Carmichael Rail transactions, “None of the transactions were specifically disclosed in the Adani Enterprises Annual Reports. We uncovered them only by reviewing financials for the private Singaporean Carmichael Rail entity.” In this scenario, Hindenburg may be beyond the purview of legal implication if those financial information were available in a database , online and public domain, On the contrary, if it accessed to AE’s financials ‘not generally available’ in public domain, it may invite legal adversary. Let us view the ethical dimensions of earning profit by short selling activities.
Some of the questions arise in the minds of the indifferent researchers as to whether the society benefits from the information about the alleged frauds and financial irregularities posted in the public domain and at the same time , next question peeps into the mind why would a company invest a period of two years in doing detailed forensic research, analysis and publishing a report which is alleged to have been instrumental in crashing a huge corporate conglomerate of international repute and presence in absence of any financial reward. It is also pertinent to establish whether anyone unfairly loses due to publishing such report which warrants a policy reason to discourage such profits. It is worth mentioning that unearthing Enron-scale frauds is a public interest . Hindenburg including its 22 employees on payroll, according to the available sources, need to financially sustain which may justify earning certain financial payoffs for doing this work as it has an opportunity cost which is a decisive factor.
It may be arguably assumed that the report would never come into existence in absence of any payoff and the employees including the founder of Hindenburg would alternatively remain occupied elsewhere. The apparent question arises that existing shareholders may lose significantly on account of share price crash of Adani Conglomerate. If the Hindenburg Report is proved true , then blaming Hindenburg for the stock price crash may not be justified. On the contrary, Hindenburg may be enforced to compensate AE for the loss it suffered by the published Report. So far, the quantum of loss suffered by AE amounts to more than Rupees 10 lakh crore since 24th January, 2023 when the Report was made public although AE CEO is confident to predict that the current market volatility is a temporary phenomenon and AE’s foundation is based on strong fundamentals and until recently it had a net worth larger than that of Bill Gates and Warren Buffett which declined by $22 billion . Government of India is committed to the cause of ‘Make in India’, Atmanirbhar Bharat’ etc and as a policy measure, it encourages the investors for investing across different industrial sectors and AE may not be an exception. India is a democratic polity and she can investigate into any financial and economic activity of any entity in order to understand whether any activity is detrimental the national interest. MCA, SEBI, RBI , MoF, Ministry Industry, Ministry of Commerce etc are the responsible establishments for maintaining check and balance and when debt exposure to the capital structure is more, it is a case of highly geared financing activity and as such financial leverage needs to be taken care of by balancing the capital structure.
Further investment is always subject to market risks and the related risks are subject to hedging according to the characteristic feature of risk exposure of the capital assets. In the case of fixed deposit, the price of the asset is independent of market risk whereas the same is not true for bonds and stocks and capital market is expected to swing with the influence of market sentiments which is not permanent in nature and perhaps that is why CEO of AE opined that whatever happened is ‘a temporary phenomenon’. Moreover, volatility in stock market creates opportunities for the investors for booking profits and variation in the price of socks and bonds is not the sole indicator of risk exposure but other variants of risk indicators are also to be examined. Influence of volatility in political and technological factors are relevant indicators of risk exposure too. India is politically stable and economy is technology savvy . Stock market functions on the basis of ‘random walk hypothesis’ and any financial economist can hardly predict the manner by which stock market would function in near or immediate future. Committing investment in infrastructure sector is more riskier because of its long gestation period and that is why ‘induced investment’ was not prescribed by J M Keynes but ‘autonomous investment’ was considered to be more effective in employment creation and income generation during the ‘Great Depression-1929-30′. Moreover, legislating more and more laws can hardly undo the risk of the investors and India has number of laws for protecting investors interests. Further, retail investors comprises of less than 2% of the population and going for more and more legislation is obviously a cost prone incidence. India should certainly bother about LICI, SBI and Financial Institutions who are the custodians of personal savings and they should not invest in risk prone capital assets. In 1998, the flagship US-64 product of the UTI faced heavy casualty due to alarming magnitude of depreciation in its units and it occurred primarily due to parking investment US-64, investments in the projects and portfolios not meant for mutual funds’ investment . Therefore, the existing regulators should monitor and watch the ongoing situation in letter and spirit within the framework of the existing laws. SEBI is the regulator of capital market and it has been given enough teeth to bite the wrong doers and similarly MCA, RBI and MoF and other Hindenburg Report provides that AE used to have in-distinctive auditors to insinuate irregularities in financial reporting. This argument seems unsustainable as law prescribes the eligibility criteria for appointment of the auditors and audit firms. It never stipulates that audit of a company should be carried out by such and such auditors and audit firms subject to exceptional circumstances.
Again, if the argument of Hindenburg is assumed to be sustainable , then why the decades’ old accounting frauds and financial irregularities of Enron, World.com, Satyaam Computers occurred under the oversight of the Big-4 needs a convincing answer. Appointment of the Big-4 auditirs is hardly an insurance of risks arising out of irregular accounting practices and manipulated financial reporting or an instrument for preventing financial frauds in one hand and a guarantee of quality financial reporting on the other. Next comes the issue of AE’s spectacular revenue growth compared to its peers. Revenue growth may be attributed with the shift of economic policy issues in the context of infrastructure development as a priority as may be envisioned in the Federal Budget 2021-2022. AE is known to be an efficient infrastructure development giant and revenue growth by 32.6% may be due to efficient project management expertise of AE. To be specific, growth rate for AE compared to that of committed capital expenditure in the economy may be arising due to the policy shift and rise in AE’s stock price to Rs. 3,800 is not inconceivable under such circumstance. Moreover, investors are influenced by shifts in technology as was observed in Dot-com bubble and government’s policy in subprime lending before the global financial crisis-2008-2009. Therefore , the Hindenburg Report- ‘the biggest con in history’ is subject to many ‘ifs and buts’ and let us wait for the outcome of legal battle initiated by AE . .
The authors are former Interim Vice Chancellor , SMVD University and Assistant Professor (Finance), NMIMS Deemed to be University, Bangalore
Follow our WhatsApp channel
