How Hindenburg Research gave a masterclass in financial globalisation

Without even betting a single dollar in the Indian market, a short seller from New York managed to torpedo the country’s most prestigious share sale, dimming the aura of unassailability around its sponsoring tycoon. That’s the power of borderless money — it can pull the ladder from under the world’s largest fortunes from 8,000 miles away. In winning the first round of its battle against Gautam Adani, Hindenburg Research has given us a masterclass in financial globalisation.  
 

Late Wednesday night in India, Adani Enterprises Ltd. informed stock exchanges that it had decided not to proceed with the $2.4 billion public offer that had concluded the previous day. The last-minute success of the fund-raising plan, engineered with the help of Abu Dhabi’s royals and family offices of other Indian billionaires, couldn’t prevent a 28% collapse in the stock the very next day. So, the board felt that going ahead with the issue “will not be morally correct,” Adani said in a statement. The subscription monies are being returned. “For me, the interest of my investor is paramount,” the 60-year-old group chairman said in a video address to shareholders. 

When Hindenburg published its report last week, accusing Adani of pulling “the largest con in corporate history,” and disclosing bets that it had taken against the group via US-traded bonds and non-Indian-traded derivatives, the Indian infrastructure conglomerate rushed quickly to deny the allegations of stock-price manipulation and accounting fraud as baseless and timed to thwart the country’s largest follow-on public offer. Thus, the share sale became the referral event to put Hindenburg’s ability to test against the wealthy industrialist’s might.

Adani was until recently a centi-billionaire. His closeness to Prime Minister Narendra Modi — a politician from his home state of Gujarat — is well known, though the businessman says he hasn’t sought or received any political favours. The backing he could expect from financial institutions and other large investors was never in doubt, and the 35% retail portion of the offer worked out to under $1 billion. How hard could it be for such a powerful magnate to raise $1 billion and squeeze out a pesky short seller sitting in New York? 

But his defence fell apart. Subjecting investors to the information overload of a 413-page rebuttal didn’t work. Nor did the rousing call to nationalism by the group’s chief financial officer, who equated Hindenburg’s attack to one of the lowest points of colonialism anywhere: the 1919 massacre by British soldiers of Indian civilians gathered in a park in Punjab. The stock didn’t hold up, but nor did Adani back down: Keeping the offer open longer or cutting the price risked embarrassment. So he rammed it through on Tuesday with the help of other billionaires. Retail investors only took up 12% of the shares reserved for them. 

A barely successful share sale had the opposite of a calming effect. Especially after Bloomberg News reporters in Hong Kong and Singapore broke the news that Credit Suisse Group AG had stopped accepting bonds of Adani companies as collateral for margin loans to its private banking clients. Until recently, some of the same securities were judged by the bank to have a lending value of 75%. Now they were being rated at zero. Once again, this bad news from overseas hit the domestic Indian equity market: The Adani Enterprises stock ended the day 28% lower. And then, the No. 1 owner of ports and airports (and a lot else besides) pulled the offer.  

As a result, Adani’s highly leveraged empire has just lost access to $2.4 billion in equity. This has, in turn, pushed some of his dollar bonds into distressed territory, where they’re being traded below 70 cents on dollar. Any rating downgrade will be calamitous. Meanwhile, investors who got their money back from the powerful mogul will have little reason to be relieved. The Adani tremors will keep travelling back and forth between India and the rest of the world. Abu Dhabi’s International Holding Co. has put money into the group in the past, and the meteoric rise of what used to be a little-known company involved in fish farms, food and real estate, according to the Financial Times, has closely mirrored that of the Adani flagship. Will the correlation hold on the way down as well?

Even for those Indians who don’t have shares in the Adani group, the concern now is the health of their portfolios. With demand for credit in the economy rising after its post-Covid-19 reopening, and lending rates firming up faster than deposit rates, local banks have been standout performers. The Adani saga could reverse that. Overseas hedge funds are already calling trading desks of Wall Street firms, asking how they could short Indian lenders, a Hong Kong-based banker told me. Financial globalisation cuts both ways. In the global cheap-money era, it minted billionaires and swelled chests with nationalistic pride. It also perhaps lulled the regulator into thinking it could relax its vigil — there was just too much money coming in to bother about its quality.  

As I wrote in September, it’s the long bets by briefcase funds from Mauritius into Adani Group shares that needed scrutiny by the Securities and Exchange Board of India. Even now, I suspect, the kneejerk response will be to find and block the short positions. Or, at least, their enabling intermediaries, who’re more likely to have an India franchise. That’s just the wrong lesson to learn from Hindenburg’s masterclass.
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