Adani, Hindenburg, short-selling and how it is all about Markets being at work: Salient aspects of the saga worth pondering over

I know I am wading into a topic that has been discussed enough in recent days. The Hindenburg report on the Adani Group has stirred a lot of interest. As Jinit Jain’s article has pointed out, the CONLEFT ecosystem’s attacks on Adani and their embrace of this report to use as a stick to beat Modi has split the right too – should they defend Adani or not? Let me ignore that for now and focus on other aspects.

1. We must understand and acknowledge that short sellers are very much a part of the overall free market ecosystem. They are often wrong and have their own profit motives – like any other player – but that doesn’t mean they can be condemned wholesale. They play a valuable role in unearthing fraud and bubble stocks. Many, like Jim Chanos, are highly respected even when they are wrong – as they have been with Tesla for a long long time. They may yet be proved right.
2. There is a special breed of short sellers that are “activists” – they go around actively promoting their theories, perhaps hoping many will buy into it, dump the stock and help turn their doomsday prophecies into reality. At that point it hardly matters if the original allegations are right or wrong.  Carson Block, Andrew Left are examples of such activist short sellers.
3. Such activist short sellers usually target the big guys. Even if they are completely wrong and motivated, one must admire their guts. There are easier ways to make money, believe me.
4. Adani is not the first or will be the last to be targeted by such people – they go for stocks with high PE, steep run-up in price and are led by visible and controversial people. After all, this is where they can find traction for their allegations and maximum profit potential – again this is not wrong. If posting crazily optimistic projections on Tesla (to name but one stock) while being long on the stock is kosher, so is posting doomsday on the same stock, hoping to profit on its decline. As long as there is proper disclosure, intelligent research or insights and the allegations survive the usual laws of defamation.
5. The shorts pay a heavy price for their positions if they are wrong or if the market doesn’t believe them, whether they are activists or not. Many lost their shirts on “meme stocks” like AMC and folded up. Of course, they also made killings, as George Soros did with the Pound sterling.
6. It is not just the right wing that attacks short sellers – everyone does, if it suits them. In fact, in woke liberal paradise of the USA, DOJ (which is supposedly independent) has opened a criminal investigation into short sellers and the FBI sent search warrants to many of them. Imagine Modi doing this! American politicians of various hues have harangued about the alleged damage “shorts” cause the economy while often playing the market themselves, including taking short positions!
7. I personally think it is more harmful to ban shorts. Yes, they ‘distort’ as the famous academic Prof Mitts report alleges. They spend huge amounts of time and money to research and uncover frauds, not to speak of personal and financial risks for uncertain rewards. If you ban them, the incentive goes. Who will be the loser? The small investor who bought into tulip-style bubbles won’t have access to such analysis.

If all this sounds like a defence of short sellers, you are right! It very much is. 

Now let us turn our attention to the specific case – Adani Group and Hindenburg. Again a few points are relevant:

1. Just as a disclosure, I don’t personally short any stock, I own them mostly for the long term. I do not own any Adani Group stock. I also have no investments in any hedge or other funds that are short-focused. 
2. Adani Group has been selected for the exact same reasons I mentioned earlier – its stock has run up quite a bit, deservedly or otherwise. But then the whole market is frothy not just in India, but in the USA too. And Adani is, to say the least, controversial perhaps next only to Musk. 
3. I am not trying to defend Gautam Adani – he is perfectly capable of doing it himself. I am more concerned about Indian infrastructure which needs more such investments given the pathetic state it was left to us when dynastic loot ended in Delhi. 

Having said that I have some comments on the report:

1. In the very first paragraph, it says the accounting frauds and other manipulations are “decades” old. In that case, the CONLEFT ecosystem may find they have scored yet another self-goal. Pidis may well be careful, your lifafas and table scrap are at risk if this starts biting the hands that feed!
2. India has signed special treaties that encourage routing investments through Mauritius etc. Obviously, Modi or Adani did not invent this loophole. In fact, in recent years the NDA government has with lots of effort, amended some treaties, tightened them – and in the process got attacked as anti-business. 
3. Having overseas subsidiaries and holding companies, especially in tax-attractive domains like Singapore, UAE etc., is not wrong in of itself – many do it. Not just Indian conglomerates. The challenges this presents to Income tax and other authorities is a separate problem that needs serious discussion but not one that focuses on any one entity.
4. It is also common for companies that fund infra such as solar or other power plants to insist on separate legal entities and related ownership structures for each project. This is to avoid the problem from one affecting the other.
5. It is hilarious to see the report pointing out close family control of the Group – this is how Corporate India (or for that matter Political India) runs! So-called key person risk etc. is well known and is hardly an Adani-specific problem. You don’t need a short seller to educate us on that!
6. Adani is into infra–transmission, green energy, power, airports, ports etc. All of these have considerable time horizons, long gestation periods and huge capital expenditures. But that is also a blessing as it is not easy to get into. It is not a group that’s into dot-com, crypto, chain marketing etc that are scams or bubble almost at birth.
7. All these businesses require funding from deep-pocketed institutional investors with a long-term view. These investors don’t read sell-side or hedge fund analyst reports to do due diligence. They have access to data, information and insights that we simply don’t. And they don’t recall loans or investments at short notice. Adani is not likely their first or only infra investment. The report’s prediction (or prayer?) of “one liquidity event” creating a cascading collapse seems farfetched.
8. What the report doesn’t talk about is equally important – loans that are NOT from related parties. Are these fickle investors? Too much short-term loans used to fund long-term projects? No idea. Related party loans, over which the report spends a huge amount of time, are resilient to short-term mood changes even if they are routed through a complex web of entities for tax or other reasons.
9. Even the attack over the current ratio, an odd metric to pick for a long-term infra group, seems half-hearted – “let’s throw this and see if it sticks”. There is no mention of what the ratio was a year ago or two years ago! Has it gotten worse or better? I guess if worse it would have found mention!
10. A lot of the Adani group assets and entities are in advanced markets like Singapore, Australia which are regulated independent of SEBI, Modi or India. 
11. The entire market cap of Adani Group – even before the decline is US$218 billions. To see this in perspective, BSE market cap total is well over $3 trillions.
12. The report itself argues that Adani controls far more of the group than he has declared – well over 75%. And it also says funds have largely avoided investing in it! If so, who exactly is the victim? Clearly, Adani has more skin in the game than most Indian lalas. In fact, many of them control their companies with far less holding and hence are not left holding the bag when things collapse. 
13. Even if the entire Adani Group collapses, it will leave India with infrastructure assets like ports that will have value in a booming economy. Buyers can be found. It is not an arms brokerage or land-flipping outfit that dynasties and their damaads are more familiar with.
14. Much has been said about the “400-page” response by Adani as if that is a crime. In fact, only 50 pages are the real response – the rest are annexures mostly of public documents. Note that the Hindenburg report is quite long as well and repetitive.
15. I do not agree that these attacks by Hindenburg constitute an “attack on India”. This line of defence will only hurt. It will be used to gloss over all the other deficiencies in the original analysis and the points made in the response. The corrupt media ecosystem has already picked on this as if that’s the only thing in the report.
16. This is not market advise and I am no expert, but my gut feel is Adani Group will survive this saga. 

But if the report leads to inventor education, curiosity about activist short sellers, better disclosure practices, stronger regulatory oversight and general cleansing of the system, it would have done far more good than harm.