Summary: a high flying Indian billionaire has been brought to earth by a devastating report alleging extensive financial irregularities; both Abu Dhabi and Israel find themselves caught up in an unfolding scandal.
On 24 January Hindenburg Reseach a US-based company and short-seller that does deep-dive financial investigations on behalf of investors released a lengthy and forensically detailed report on the Adani Group, headed by the Indian billionaire Gautam Adani. Hindenburg headlined their bombshell “How the world’s 3rd richest man is pulling the largest con in corporate history.”
Hindenburg Research reveals a lengthy list of dodgy practices that Gautam Adani and his family have allegedly carried on for the better part of two decades. They run the gamut: stock parking, round tripping, stock rigging, related party transactions, over-invoicing, inflating share values and running a lengthy skein of offshore shell companies.
Gautam Adani’s older brother Vinod is said be behind the Adani web of shell companies, at least 38 of them in Mauritius and four in the UAE. In one of several examples cited by Hindenburg, a Mauritius shell company Krunal Trade & Investment lent US$253 million to an Adani private entity without disclosing it was a related party loan. Money then travelled from the private entity to one of Adani’s publicly listed companies. “The net result,“ Hindenburg says “is that Vinod Adani’s funds, with no discernible business behind them, wound their way through an actual operating Adani private entity to show up on the balance sheet of publicly-listed Adani Enterprises.” The report continues “We have no way to know how Krunal had a quarter of a billion U.S. dollars to lend (Krunal doesn’t advertise lending services on its website). The entire transaction bears red flags of money laundering.”
Another Vinod Adani shell company, Emerging Market Investment DMCC, operating out of a UAE flat, lent US$1 billion to an Adani Power subsidiary. Hindenburg notes the company “lists no employees on LinkedIn, has no substantive online presence, (and) has announced no clients or deals.”
Hindenburg makes clear that Adani is very much a family affair with Gautam both the public face and the top boss calling all the shots. The report quotes a former senior executive: “as far as any key decision-making, I would say it all flows back to Gautam Adani. All key decisions are made by Gautam Adani himself.”
The opacity with which the money flows back and forth between shell companies and privately and publicly listed ones may be what proves to be the Adani Group’s downfall. Hindenburg notes:
the Adani Group companies are intricately and distinctly linked and dependent upon one another. None of the listed entities are isolated from the performance, or failure, of the other group companies. We believe it could take only one serious liquidity event at a single entity to trigger a negative cascade of events at other group entities which could affect the entire Adani Group.
Adani denies all the accusations, issuing a 413 page statement 29 January claiming: “This (report) is rife with conflict of interest and intended only to create a false market in securities to enable Hindenburg, an admitted short seller, to book massive financial gain through wrongful means at the cost of countless investors.” Hindenburg Research immediately fired back calling the Adani Group statement “a bloated response that ignores every key allegation that we raised.”
By that stage a rout of Adani Group was well and truly underway. In the first few days of the release of the Hindenburg report, Adani lost US$ 85 billion. By 10 February the losses had hit US$120 billion with major investors taking fright. Among them was Norway’s US$1.3 trillion sovereign wealth fund which announced it was selling off its Adani shares. Meanwhile the stock index compiler Morgan Stanley Capital International (MSCI) raised the red flag on outflow concerns and what is known as a free float: the proportion of shares that can be purchased publicly by international investors. MSCI determined “that the characteristics of certain investors have sufficient uncertainty that they should no longer be designated as free float pursuant to our methodology.” Cue more exits. By the week-end Gautam Adani had tumbled down the list from 3rd richest to 17th richest man in the world.
Watching the bloodbath unfold will be two very interested Middle East parties. The first is Tahnoon bin Zayed, the brother of the UAE president Mohammed bin Zayed. The second is the Israeli prime minister Benjamin Netanyahu.
As Matthew Hedges wrote in our 6 June newsletter Tahnoon is the strategic architect who behind the scenes has built and manages the vast business affairs of the Al Nahyan, Abu Dhabi’s ruling family. He is a full brother to the president and Abu Dhabi ruler Mohammed bin Zayed and one of six brothers who form the powerful Bani Fatima bloc. Tahnoon, Hedges writes, “created the private conglomerate Royal Group and more recently the Sovereign Wealth Fund ADQ. He is also Chairman of the UAE’s largest lender, First Abu Dhabi Bank (FAB), as well as International Holding Company (IHC) and Group 42 (G42).”
On 30 January as the storm continued to break over Gautam Adani’s head, IHC made an extraordinary intervention in support of the Adani Group, announcing it was backing the company’s US$2.5 billion follow-on public offer (FPO) with a US$400 million commitment. According to Arabian Business the decision was taken by Tahnoon “based on facts.” His CEO was quoted stating “our interest in Adani Group is driven by our confidence and belief in the fundamentals of Adani Enterprises Ltd; we see a strong potential for growth from a long-term perspective and added value to our shareholders.”
Two days later Adani Group pulled the FPO saying it did so to protect investors. Arabian Business reported that volte-face without mentioning the IHC investment, an example of how tightly domestic media is controlled in the UAE.
According to Gulf States Newsletter (subscriber access) IHC is deeply invested in Adani Group. Last May it tipped US$2 billion into Adani Green Energy, Adani Transmission and Adani Enterprises. The share value of all three subsequently rose dramatically before an even more dramatic collapse in the wake of the Hindenburg report. GSN estimates IHC “may be sitting on losses of $770 million.”
Seemingly unruffled by his empire unravelling, Gautam Adani popped up in Haifa to shake hands with Israeli Prime Minister Benjamin Netanyahu on 31 January. The occasion was the sealing of a US$1.2 billion purchase of Haifa Port by the Adani Group. Netanyahu hailed it as “an enormous milestone” that will, according to the prime minister, encourage connectivity between India and Israel, a concept he said he had discussed at length with his “good friend” Narendra Modi. The Indian prime minister is also, it appears, a good friend of Gautam Adani: his administration, as noted by Hindenburg, has stepped in on several occasions to halt investigations into the Adani Group’s financial activities.
In addition to boosting trade links with India, the port purchase has been projected as the starting point for an ambitious undertaking to link the Gulf states to Israel and the Mediterranean via a rail line. Such a project though long mooted has several obstacles to overcome, not least the current tension between Jordan and Israel (the line would run through Jordan into Saudi Arabia then on to Medina and across the kingdom to Dammam on the Persian Gulf.)
That did not deter Gautam Adani from tweeting “The Abraham Accord (sic) will be a game changer for the Mediterranean sea logistics. Adani Gadot set to transform Haifa Port into a landmark for all to admire.”
Indeed the railway, were it ever to be built, would hugely assist in drawing Saudi Arabia into the Abraham Accords, joining two other Gulf states, the UAE and Bahrain, in Israel’s circle of Arab friends and allies. That would be a huge coup for Netanyahu. But with the Adani brand, like the original Hindenburg, seemingly going down in flames there will be nervous moments in Abu Dhabi and Tel Aviv.