Adani Hindenburg Issue Explained for UPSC Exam | Testbook.com

Understanding the Adani-Hindenburg Controversy

Who is Hindenburg?

• Hindenburg is an institute known for conducting “forensic financial research.” In simpler terms, they delve into the business world to uncover any corrupt practices, such as accounting irregularities and unethical management behavior.
• Hindenburg, a US-based investment research firm, is known for its expertise in activist short-selling.
• The firm was established in 2017 by Nate Anderson, a chartered financial analyst and a chartered alternative investment analyst.

What does short selling mean?

• According to the Securities and Exchange Board of India (Sebi) , short selling refers to the process of selling a security or share that the seller does not own. The primary aim of short selling is for an investor to sell borrowed shares in the market, anticipating that they can repurchase them at a lower price later.
• Essentially, short selling is the exact opposite of the typical stock market investment strategy. Instead of buying a stock with the hope of its price increasing over time, a short seller anticipates a decrease in the value of a stock and sells it accordingly.
• An investor engaging in short selling doesn't need to own the shares of the company they are selling. They can borrow the shares or assets from a broker or dealer and sell them.

What are Hidenberg’s allegations against the Adani group?

Hindenburg Research has accused the Adani Group of engaging in “stock manipulation and accounting fraud”. The Adani Group operates in a wide variety of sectors, including ports and logistics, power generation, agribusiness, real estate, defence, solar energy, financial services, natural resources, and media.

• The research firm claims that the Adani group has been involved in a whopping ₹17.8 trillion (US$ 218 billion) stock manipulation and accounting fraud schemes over several decades.
• The report by Hindenburg alleges that the Adani family has control over offshore shell entities in tax havens ranging from the Caribbean and Mauritius to the United Arab Emirates. These entities, the report claims, were used to facilitate corruption, money laundering, and taxpayer theft, while draining money from the group's listed companies.

Image source: Indian Express

The potential implications of the report:

• The Adani group has borrowed a considerable amount of money from Indian banks. This raises concerns about whether the conglomerate will be able to repay the loans on time.
• There is always a risk associated with banks lending large sums of money against shares. If a company fails to meet its debt obligations, its share price often falls, resulting in losses for the bank.
• LIC has also invested in the Adani group's businesses. The sudden drop in the investment value due to the report has caused fear among investors about potential losses.

These factors could potentially lead to a surge in non-performing assets in the near future, which could negatively impact the bank's lending capacity.