How A Small Vigilante Company Is Outperforming The Government


India’s Gautam Adani’s wealth increased from $9 billion to $127 billion between 2019 and 2022. He temporarily held the title of second-richest person in the world as the value of his seven publicly traded firms, which offer everything from natural gas to digital services, rose. A small US investment company called Hindenburg Research, which seeks to make money by exposing corporate wrongdoing, became interested in him as a result of his remarkable rise.

Hindenburg Research quietly launched a two-year probe into Adani’s vast company empire after viewing the several-hundred percent year-over-year increases of many of his enterprises with mistrust. They just disclosed their findings, which revealed that Adani and his associates—many of whom were members of his immediate family—had committed numerous significant frauds.

The report, which is over a hundred pages long and draws on several hundred sources, makes a number of accusations, ranging from stock price manipulation and accounting fraud to intimidation and corruption. A network of shell companies with Mauritius (small island country) addresses is described in detail by Hindenburg in order to move money covertly between Adani’s corporate entities and make each company’s financials appear much better than they actually are. They also accuse Indian regulators of purposefully turning a blind eye while Adani and his associates enrich themselves.

Immediately after the report broke, Adani issued a broad denial and vowed to take legal action. Yet, the markets weren’t comforted. Adani Group has lost 25% of its value since Hindenburg’s report was released, and Adani’s combined losses for the week total roughly $48 billion.

The Adani Group is not the only one Hindenburg has managed to expose, however. In 2022 Hindenburg exposed Nikola as a scam, finally landing its creator, Trevor Milton, in jail. Lordstown, another manufacturer of electric vehicles, was the target of Hindenburg’s whistleblowing, which led to a significant reorganization of the organization’s management and a shareholder lawsuit.

Hindenburg’s research team began thorough investigations in both incidents, speaking with former workers and doing on-site examinations, based on its fears regarding Nikola’s technology and Lordstown’s reservation numbers. Before publishing its research, Hindenburg took sizable short positions in each firm after learning various lies, making a tidy profit as the stock prices of both Nikola and Lordstown fell. Taking a short position is when one borrows a certain stock, sells it, and hopes that they can buy back the stock later at a lower price. In this case, Hindenburg is hoping that their target companies will have a drop in stock prices after being exposed as frauds.

Other than the startling price rises of several hundred times (seen below), Hindenburg immediately noticed other warning signs in the case of Adani’s empire. One of them was that the business struggled to retain a chief financial officer (with five in only a few years). However, the only independent audit company Adani Group identified on its payroll was a mysterious offshore organization with only a few visible personnel, and this was done to oversee thousands of unique transactions involving several hundred different businesses.

Figure 1 – Stock gains for the Adani Group 

The first column shows how many stock a company has. The second column is the value of all the stock combined. The third and fourth row shows how much the stock for each entity of the Adani Group increased over 1 and 3 years, respectively. 

Researchers at Hindenburg came to the conclusion that barring any criminal activity, Adani’s combined ventures are probably 85% overvalued given their actual debt-to-capital ratios. They arrived at this conclusion after locating former employees, conducting interviews with a number of former senior executives, and obtaining public corporate records.

The four hundred-page defense Adani’s team published over the weekend (which barely addressed Hindenburg’s eighty-eight concluding questions) or Adani’s initial statements, which failed to calm the markets, were no better; the Economic Times reported early on January 31 that Adani’s companies would hire one of the “big four” internationally renowned accounting firms to come in and conduct an independent audit.

Whether or not they comply fully is a matter of discussion as at the time of writing, the Adani Group has yet to complete the audit with just days left to go.

As this tale develops, there will undoubtedly be calls for further and new laws, much like with FTX. It is important to note that regulators frequently are useless while having all the authority in the world, in addition to distorting markets. Yet, despite the increased regulation of the Sarbanes-Oxley Act’s stricter accounting requirements, corporate fraud still exists.

Hindenburg and other activist short sellers are at the forefront of a new approach to market regulation. Even if an investigating firm gave false information, any distortions brought on by a single firm could be immediately fixed, greatly enhancing market efficiency. It should come as no surprise that a profit-seeking company does a better job of monitoring the market and warning investors of fraud than legally protected bureaucrats.

Editor’s Note: This article was originally written on February 23rd, 2023, but was not posted until now due to some communication issues. All of the information is still relevant and correct, and the Adani Group is still reeling from the blow delivered by Hindenburg.