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Introduction : 

A global company, Adani Group has holdings in ports, logistics, agribusiness, energy, real estate, and defense. The corporation is a significant factor in the Indian business community with revenues of over $11 billion in the fiscal year 2021. The Hindenburg report asserts that the business overstated its riches and understated its liabilities by using unethical accounting techniques. The market capitalization of Adani Group decreased from Rs 19.18 trillion on Jan. 24, the day prior to the Hindenburg Research report, to Rs 10.07 trillion on Feb. 3. It was forced to cancel the FPO for its major business. 

On January 24, 2023 an American corporation, a short-seller Hindenburg published a report suggesting that the Indian supercompany had been inflating its numbers for years using a variety of dubious methods. The main charges in the 100-page report are that Adani’s associates have utilized a network of obscure, offshore shell firms to acquire and sell shares in his companies, and inflate their prices to make them appear more creditworthy. 

Hindenburg contends that by increasing the perceived value of the businesses, Adani Group might draw in additional investment or obtain more loans with stock as security. Hindenburg supposedly held short positions on the Adani Group’s US-traded bonds and non-Indian-traded derivatives at the time it was published and stood to profit if investors abandoned Adani.

Analysis of the Hindenburg Report: 

The Hindenburg Research LLC is a short-selling American Corporation founded in 2017 and based in New York which primarily does investment research. The Hindenburg Research assessment on the Adani Group, which was published in January 2023, is a critical examination of the financial and operational procedures used by the Indian company. The article has ignited a contentious discussion over one of India’s leading corporations’ business practices and raises significant concerns about the morality and legality of Adani Group’s operations. 

According to the research, the company has accrued significant revenue from joint ventures and subsidiaries that are not included in its consolidated financial statements, and this presents an inaccurate picture of the company’s financial condition and profitability. The Hindenburg investigation accuses Adani Group of insider trading and tax evasion in addition to these financial issues. According to the report, these charges are supported by documents gathered from Indian government and regulatory bodies.

Additionally, the report condemns Adani Group for its environmental practices, charging the firm with widespread deforestation, endangering delicate ecosystems, and contaminating groundwater and the atmosphere. Adani Group is said to have disregarded community concerns and failed to adhere to environmental laws. The Hindenburg report’s accusations have been strongly refuted by Adani Group, which called them “baseless and slanderous.” The business has made it clear that it operates in accordance with the highest ethical and environmental standards and is completely compliant with all Indian laws and regulations.

Effect of the Hindenburg Report : 

Adani Group vehemently refuted the allegations, but investors quickly left. By February 8, the $236 billion company was valued at just $127 billion. And they have had significant knock-on effects.

Adani Total Gas fell by 5% to Rs 1258.25 after reporting a 13 percent gain in net profit on higher sales, while Adani Enterprises, the flagship company of the Adani group, fell more than 8% to Rs 1,765.00 in early trade. Adani Green Energy decreased by 4.39 percent, Adani Transmission by 5%, and Adani Power by 4.97 percent.

Even if shares of the Adani group avoided being removed from MSCI Inc. indexes, the decline continued. However, according to Reuters, the index provider MSCI said it has reduced the free-float designations of four Adani Group shares, a move that analysts have cautioned could affect their index weightings.

All of the Adani Group’s firms experienced sharp declines in share prices following the publication of the Hindenburg report, which has now lasted a whole week. The Adani Group might have lost up to $108 billion, including the business tycoon’s personal worth of $48 billion.

Despite the FPO being completely subscribed, Gautam Adani decided to cancel it due to the enormous decline in the value of the Adani equities. Adani claimed that the choice was made by the board to safeguard investors’ interests and that the funds raised would be refunded.

A historic FPO for the Indian stock market that was scheduled to take place had to be canceled. As a result, investor confidence was further damaged, and Adani stock continued to decline.

Response of the Adani Group to the report :

The accusations made in the Hindenburg Research report have been contested, and Adani Group has filed a lawsuit against the research company. In reaction to the article, the company has released a number of statements disputing the claims and defending its business operations.

The Hindenburg Research report, according to Adani, is based on inaccurate and misleading material and was written with the intention of harming the company’s reputation. To defend its reputation and make sure that the public is informed accurately about its operations, the company filed a lawsuit against the research company.

The Gautam Adani-led company has retained Wachtell, Lipton, Rosen and Katz as its defense counsel in the legal dispute with Hindenburg, according to a Financial Times article from February 8th. Wachtell is one amongst the priciest law firms in the US. 

The Supreme Court’s Comment :

In order to investigate the effects of the fraud allegations against the Adani Group, which have destroyed millions of dollars’ worth of investor wealth and sparked virulent attacks on the government by the opposition, the Supreme Court on Friday proposed the creation of a panel of experts, including a judge.

The Supreme Court has seeked to know from the Union Government and the Securities and Exchange Board of India ( SEBI ), ways in which investors can be protected from the volatility of the kind that has currently affected the shares of the Adani group. Regulatory and statutory reforms are required to protect the interests of the shareholders. A panel led by an expert judge may be set up for the empirical analysis of the current market impact. 

A bench consisting of the Chief Justice of India, DY Chandrachud, Justices PS Narasimha and JB Pardiwala had expressed the court’s concerns towards “examining, strengthening of the regulatory mechanisms to ensure that Indian investors are protected against the volatility, the kind of which was witnessed in the recent few weeks”. The bench has asked the Solicitor General to seek from the experts in the finance ministry for a response on the issues which have been bookmarked by the court. The Court claimed that its goal was to protect Indian investors rather than “throw doubt on any regulatory structure” or “get into policy considerations.”

The Bench heard two petitions regarding how the Hindenburg Research report had affected the share prices of Adani group firms and how it had caused major disruption to the investors’ community in India. These petitions had asked the Court for a detailed enquiry into the matter. 

SEBI’s Comment : 

Solicitor General Tushar Mehta has stated that the Securities and Exchange Board of India ( SEBI ) has majorly taken up the analysis of the issue to help in setting up a robust regulatory framework to cope with the volatility. 

Without specifically mentioning the Adani Group, the regulatory body had earlier stated in an official statement that anomalous price movement in the equities of a corporate conglomerate had been seen over the previous week.

The regulator also said that the required surveillance procedures are in place to address any undue volatility in certain shares. It went on to say that if any information on a specific entity came to its attention, it would be investigated in accordance with current policies before taking the necessary action.

Three Adani group companies — Adani Enterprises, Adani Ports and Special Economic Zone, and Ambuja Cements — have been placed under the short-term additional surveillance measure (ASM) of the stock exchanges BSE and NSE. This effectively means that intraday trading in these stocks would require a 100 percent upfront margin.

Conclusion : 

It is significant to remember that Hindenburg Research is a short-selling research company, and that many of its analyses of the firms it covers are negative. Given that it has shorted Adani Group’s stock, the company has a stake in the stock’s price falling. This indicates that if the stock price declines, the company will profit. 

As a result, it is vital to seek out independent verification of the assertions stated and to proceed with considerable care when considering the report’s allegations. The stock price of Adani Group has already decreased as a result of the publishing of the Hindenburg report. The report has also triggered a larger debate about Indian corporations’ business practices and the requirement for greater accountability and transparency.

The Supreme Court asking for a detailed analysis and regulation of the Indian stock market scenario which has lost the confidence of Indian investors over the previous week and the recommendation of the constitution of an expert panel to assess the matter, is an excellent depiction of how the judiciary checks over the government authorities and the legislature. The Court after commenting on the petitions received by it, duly advised the respective regulatory authorities to take immediate steps to protect the welfare of the investor community. 

Although the loss in billions do not adversely affect the Adani group in its long term growth, it surely has had an impact on the stock market investors of India. The citizens can look forward to stronger regulations from the Securities and Exchange Board of India and also an explanation from the Union as to how to confidently invest amidst the volatility of the Indian stock market. 

ARTICLE BY PRIME LEGAL.