The biggest business story in the world this week? Short seller Hindenburg Research’s January 24 report that accuses India’s flashiest conglomerate, Adani Group, of stock manipulation, accounting fraud, and yes, corruption. What’s the corruption connection? Let’s take a look.
The Hindenburg report describes Adani as possibly the “most egregious example of corporate fraud in history.” Hindenburg says, “The Adani Group has previously been the focus of 4 major government fraud investigations which have alleged money laundering, theft of taxpayer funds and corruption, totaling an estimated U.S. $17 billion.”
For those unfamiliar with Adani, it’s a wildly successful family-controlled group that has some publicly traded securities. It lands massive deals with governments in India and elsewhere, often involving port operations, power plants, and natural resources.
Hindenburg’s report includes allegations of corruption concerning three Adani projects in India. Nowhere in its report, however, does Hindenburg make fresh allegations of corruption. Instead, the NYC-based short seller repeats allegations brought by others, either official sources or the press.
Most of Hindenburg’s report deals with alleged financial fraud and stock manipulation, mainly through related-party transactions. Hindenburg concludes by posing 88 questions for Adani.
Of those 88 questions, I found only one that deals expressly with corruption. Question #74 asks about an iron ore project for India’s Karnataka state (with original links):
In 2011, the parliamentary Ombudsman for the Karnataka state issued a 466-page report describing Adani as the “anchor point” for a massive INR 600 billion (U.S. $12 billion) scam involving the illegal importation of iron ore, alleging that Adani had bribed all levels of the government in facilitation of the scheme. What is Adani’s response to the investigation and the extensive evidence presented as part of these findings?
As background for the question, Hindenburg says the government investigation concluded that “systemic corruption of state officials amounted to ‘large scale corruption and complaints of profiteering through illegal mining with the complicity of the authorities in all levels of Government’, including the state´s chief minister. [Pg. 2]”
Hindenburg’s report continues:
Justice Hegde, the former Supreme Court judge who oversaw the investigation, eventually resigned in protest over the unwillingness of the government to actually do anything about the alleged mass-corruption he uncovered. The government seemingly turned its guns on the investigators instead.
In its response to question #74, Adani says:
The proceeding has been closed in July 2017 in our favor. However, in the interest of governance and transparency to all of our stakeholders, the following are details of the matter. The Special Investigation Team (SIT) formed by Karnataka Lokayukta had lodged an FIR against AEL [Adani Enterprises Limited] and others. The same was publicly disclosed by AEL vide stock exchange disclosure dated July 30, 2011. [link here.] The SIT and after a detailed investigation, determined the allegations were false and filed a closure report stating that AEL was not involved in such alleged illegal gratification. This has been accepted by the designated Lokayukta court at Bangalore.
Responding to Hindenburg’s broader allegations of fraud and market manipulation, Adani says it made all required disclosures and is fully compliant with all local laws. It accuses Hindenburg of publishing “a malicious combination of selective misinformation and concealed facts relating to baseless and discredited allegations to drive an ulterior motive.”
So far, Adani hasn’t taken formal action against its new nemesis, Hindenburg Research. In the past, it moved aggressively to silence or punish critics. One of Hindenburg’s questions to Adani asks about those aggressive tactics.
Hindenburg’s Question #87: If Adani Group has nothing to hide, why does it feel the need to pursue legal action against even the smallest of its critics?
Adani’s Response: Being open to criticism does not mean we have given up our legal right to defend ourselves against defamatory and false statements. We have exercised our rights in due compliance with law and through judicial processes in this respect.
No company wants the kind of attention Adani is now getting. The impact on it has been profound; since Hindenburg published its report, the market value of publicly traded Adani companies has fallen by about half — from $218 billion to $108 billion.
The storm over Adani won’t blow over quickly. It will face many more questions, and some are likely to be about alleged corruption in India and perhaps other countries where it does business, such as Australia and Indonesia.
Sooner or later, we’ll learn the answers to those hard questions from Adani or someone else.
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