Shares in Adani Group companies plunged in Indian trade on Friday, extending losses prompted by a short seller's research attack, and affecting the company's attempt at a record-setting secondary stock sale in India.
The U.S. short-sales specialist Hindenburg Research released a report on Tuesday night Asian time alleging that founder Gautam Adani, the world's third-richest person, is "pulling the largest con in corporate history," as I outlined on Wednesday. Hindenburg has taken a short position in Adani corporate bonds and derivatives outside India, and questions the group's accounting, use of offshore shell companies, and high debt levels.
The group's flagship, Adani Enterprises (NSE:ADANIENT), is today opening its follow-on offering, as its red-herring prospectus indicates, looking to raise as much as US$2.45 billion when the offering closes on January 31.
But Adani Enterprises shares are down 18.3% today. The company is offering the shares in a range between 3,112 and 3,276 rupees per share. Retail investors can bid today through the end of the month.
After today's fall, the stock is languishing at 2,769 per share, hardly making the follow-on price attractive. Before the report, they started this week at 3,440 rupees per share.
Anchor investors, which commit to take a chunk of shares ahead of the retail offering, were allocated the stock at 3,276 rupees, the top of the price range. The anchors include Malaysia-based Maybank, the Abu Dhabi Investment Authority, Citigroup (C) , Goldman Sachs (GS) , Morgan Stanley (MS) , and the massive Life Insurance Corporation of India (NSE:LICI), with 1.5 times demand for the shares on offer.
The Indian subsidiary of Jefferies (JEF) is one of the lead managers on the secondary offering, alongside ICICI Securities and SBI Capital Markets.
Adani Enterprises stock has shot from just 128 rupees per share in March 2020, in the immediate aftermath of the outbreak of Covid-19, to a price north of 4,000 rupees per share in November.
The hedge-fund manager Bill Ackman took to Twitter to characterize the Hindenburg report as "highly credible and extremely well researched." Ackman, who says he is neither long nor short Adani, warns that Adani's response "speaks volumes," and therefore "Caveat emptor."
Ackman, the founder and CEO of Pershing Square Capital Management, compared Adani to Herablife (HLF) , which Ackman continues to attack as a "pyramid scheme." Ackman bet some US$1 billion against Herbalife, having made his name shorting U.S. bond insurer MBIA (MBI) , but exited the Herbalife position at a significant loss after rival activist Carl Icahn took an opposing position and bid the shares higher.
Other Adani Group companies are also off significantly on Friday, after much milder losses on Wednesday immediately on the release of the report. Indian markets were closed on Thursday for Republic Day, India's celebration of its constitution.
Several are down by the 20% daily limit on Friday, including Adani Green Energy (NSE:ADANIGREEN), Adani Total Gas (NSE:AGTL) and Adani Transmission (NSE:ADANITRANS).
Affiliate Ambuja Cements (NSE:AMBUJACEM) is down 16.7%, Adani Ports and Special Economic Zone (NSE:ADANIPORTS) is down 15.2%, foodstuffs manufacturer Adani Wilmar (NSE:AWL) is down 5.0%, and thermal-power producer Adani Power (NSE:ADANIPOWER) is also down 5.0%.
The Nifty 50 index of large caps on the National Stock Exchange is down 1.6% on Friday, with the Sensex on the Bombay Stock Exchange down a similar 1.5%. Indian exchanges limit the maximum one-day loss or gain to 20%. Adani shares are seeing much higher volumes than normal.
It's not easy shorting shares. The tendency is for other investors to dislike and mistrust short sellers. There are trillions of dollars invested long, with an extensive industry of sell-side analysts and investor relations staff promoting companies and their listed instruments, intending to drive them higher.
But short sellers serve an important role if they tell us the emperor is walking around without any clothes. While Ackman came under regulatory fire for public relations spending in his battle against Herbalife, companies often have huge public relations departments on the other side, talking their own prospects up. Fair's fair.
Hindenburg Research made its name with a 2020 report on the would-be electric truck maker Nikola (NKLA) , which had seen its market capitalization eclipse that of Ford (F) , despite not yet having a production vehicle. Founder Trevor Milton was forced to step down and the shares cratered. Hindenburg had highlighted a host of issues, most notably that video of its supposed prototype Nikola One semi truck speeding along a desert highway was in fact showing a nonfunctional "pusher" model that was towed to the top of a hill, then freewheeling down.
Adani followed up its first comments on Thursday with a new statement that the "maliciously mischievous, unresearched report" from Hindenburg has created volatility in Indian stock markets that is "of great concern and has led to unwanted anguish for Indian citizens." It says it is "deeply disturbed" by an "intentional and reckless" attempt to mislead the investing community about the Adani Group.
Adani is "evaluating the relevant provisions" under Indian and U.S. law "for remedial and punitive action" against Hindenburg.
Hindenburg, named for the German airship that blew up in New Jersey in 1937, calls that episode "the epitome of a totally made-made, totally avoidable disaster." Founder Nate Anderson, a former fund raiser for hedge funds, says the company looks "for similar man-made disasters floating around in the market" before "they lure in more unsuspecting victims."
Adani, which has won reams of Indian government contracts for its utilities and commodities businesses, is so big that it may pose systemic financial risk if it runs aground. Its companies have lost a combined US$50 billion in market cap after the Hindenburg report, and the group's bonds and loans are extensively held by Indian state-owned banks and life insurers.
The Life Insurance Corporation of India alone, majority owned by the Indian government, held 4.6% of the combined market cap of Adani Enterprises, Adani Green Energy, Adani Ports, Adani Total Gas and Adani Transmission as of the end of Q3 last year, according to a Quartz story indicating the group "is growing too big to fail." Already, questions were swirling surrounding the large amount of debt that the companies have taken on.
Hindenburg says it welcomes a response from Adani, having posed 88 questions for its founder. It says the group hasn't responded to those substantive issues raised and has instead "resorted to bluster and threats." The company issued a statement that it would "welcome" legal action because that would give it the chance to request a "long list of documents" by way of discovery.
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