Market lessons from Hindenburg vs Adani

In this edition let us analyse the biggest news of the week – Adani Enterprises Ltd (AEL) calling off their ~₹20k Cr follow-on public offer (FPO). Let us recap the facts.

A publicly listed company raising funds through fresh equity is termed as a FPO. Market watchers had long expected an Adani FPO, as a strategic move to monetise on the dream rally Adani stocks have had in the past 2.5 years. In Mar 2020 AEL stock was trading at ₹128 which had reached ₹3903 on 25th Nov 2022. A valuation jump (price/earnings ratio) from ~12x to 361x. Even best performing tech companies cannot command such valuations.

Banking on this market-defying performance, AEL (incubator company of many of the Adani businesses) had announced its FPO of $2.4 Bn last November, which opened for subscription on 27th January with a price band of ₹ 3100-3300. As per the market reports, ~50% of 2.4 Bn was earmarked for retail investors, ~21% for Non-institutional investors (NII), ~28% for Qualified Institutional Investors (QIB) and a small portion for Adani group employees.

On 24th January, US short-seller Hindenburg Research published a report accusing the Adani Group of stock-price manipulation and accounting fraud for decades. Short-sellers aim to profit from overvalued stocks by betting on their imminent fall in stock price. They announced the seven key listed Adani companies have a significant downside of 85% due to over valuation.

First, Hindenburg alleged ‘Stock Parking’ by the Adani group. Stock Parking is the illegal practice of selling shares to another party with the understanding that the original owner will buy them back after a short time. The goal of parking is to conceal a stock’s real ownership while maintaining the appearance of regulatory compliance.

Indian Securities Regulator SEBI’s rules require a minimum public shareholding of 25% in listed companies to ensure a minimum level of liquidity, to reduce insider trading, market manipulation, and to minimize volatility.

Hindenburg produced a list of suspected offshore funds & shell companies closely linked to Adani group that own stock in the listed companies which effectively breaches the 25% public holding rule.

The report alleges this mechanism is affected by diverting funds from listed Adani companies to Adani family private offshore trusts & companies. These trusts & companies, helmed in most of the cases by Gautam Adani’s elder brother Vinod Adani, redirect the funds to Mauritius based shell entities which then invests or trades in Adani group stocks. Hindenburg lists 5 such funds with cumulative assets over $8 Bn almost exclusively invested in Adani group stocks.

Hindenburg Research alleges that suspected stock parking entities have accounted for as high as 30-47% of the ‘Delivery Volume’ in Adani stocks, suggestive of circuitous trading and manipulation. Delivery volume refers to the number of shares that are traded over a given period of time. It simply shows the level of participation (interest) of the market participants at a particular price point.

Second, Hindenburg Research alleges that capital is moved from offshore entities to private Indian companies in Adani group often through ‘undisclosed related party transactions’ which are violative of the law. Capital is then transferred to the listed companies, in order to make them appear more creditworthy or solvent.

Third, Hindenburg Research alleges that AEL lacks robust financial checks & controls, expected of a conglomerate of such global size. This is reflected in lack of credible independent auditors, lack of stability in the CFO role (5 changes in last 8 years).

Fourth, the report points out that investment banks and professional investors have steered clear of Adani listed companies. Despite Adani listed companies featuring in domestic and overseas indices, no active local fund owns Adani Green, Adani Enterprises, Adani Total Gas or Adani Transmission above 1% of equity, according to shareholding disclosures.

Fifth, the report also brings about the historical cases, inquiries initiated against the Adani group leadership team members for financial impropriety, and ends with a pointed list of 88 questions for clarification.

On 25th January, stock prices of all Adani listed companies plummeted and continued their free-fall in the following days. Adani group fervently rejected all the accusations by projecting a nationalist posture and ascribing all allegations as a conspiracy.

The FPO was fully subscribed due to oversubscription by QIBs and NIIs. Expectedly, retail investors stayed away with only a 12% subscription of their earmarked share.

But global finance is an interconnected world. The repercussions of the Hinderberg Report went beyond the FPO with global media outlets turning their gaze on the Adani group. Credit Suisse halted accepting Adani linked bonds as collateral. One of the Dow Jones indices, decided to drop AEL from its index. Demands for a regulatory probe became loud in India.

On 1 Feb, AEL in its wisdom decided to scrap the FPO and announced to return the proceeds claiming to respect investor sentiments. As I write, the stock surged 21% on Friday. But this issue goes beyond what ultimately happens to the stock prices of Adani listed companies.

The long-term significance lies in how big business relations with the government are structured in India. It would be in the best interest of all Indians that we evolve towards a pro-market rather than a pro-corporate economy.

By pro-corporate I mean, the widespread perception that select big business houses get preferential treatment either through government actions or deliberate inactions.

Markets function on trust. Efficient markets lead to economic growth which leads to equitable prosperity in the long term. Cutting edge research, innovations and startups are more likely to emerge and scale in efficient markets.

Role of the state should be of a neutral enabler rather than a selective arbiter for few. This is best ensured through various independent regulatory institutions and a vibrant media.

Ecosystem Ventures This Week

Key Highlights – Events

We are pleased to announce that Ecosystem Ventures had the inaugural pitch event of 2023 this week, where two of our shortlisted startups pitched to more than 60 angel investors, who joined either remotely or graced our office with their presence.

To view our active deals visit here.

Startup Funding Summary

Enzene Biosciences, Bengaluru-based biotech company, has raised $50 Mn in a funding from Alkem Laboratories, Eight Roads Ventures and F-Prime Capital – Read More

Freightify, Chennai-based freight rate management SaaS platform, has raised $12 Mn in Series A funding from Sequoia Capital India, TMV, Alteria Capital, Nordic Eye Venture Capital and Motion Ventures – Read More

CapGrid, Gurgaon-based B2B cloud manufacturing startup, has raised $70 Mn in a funding round from Nexus Venture Partners, Axilor, Anicut Capital and Deepak Jain – Read More

The Esports Club, Bengaluru-based gaming marketing services provider, has raised $3 Mn in a funding from KOMLAY Group and SAMBAVANATH Group – Read More

Saarthi Pedagogy, Ahmedabad-based edtech startup, has raised $1 Mn in Series A funding from GVFL Limited and Pinnacle Investments – Read More

M&A Snippets

Bengaluru-based IT service assistance provider ReadyAssist has acquired Vadodara-based two-wheeler servicing firm SpeedForce for $10 million – Read More