On January 24, short seller Hindenburg Research dropped a report called Adani Group: How The World’s 3rd Richest Man Is Pulling The Largest Con In Corporate History, in which Hindenburg accuses Indian conglomerate Adani Group of engaging in “a brazen stock manipulation and accounting fraud scheme over the course of decades,” among other things. A lot of things. Like poorly concealing shell companies (“13 websites were created for Vinod Adani-associated entities; many were suspiciously formed on the same days, featuring only stock photos, naming no actual employees and listing the same set of nonsensical services”), uncomfortable nepotism (“The group’s very top ranks and 8 of 22 key leaders are Adani family members, a dynamic that places control of the group’s financials and key decisions in the hands of a few”), and information suppression through force (“Adani has repeatedly sought to have critical journalists or commentators jailed or silenced through litigation, using his immense power to pressure the government and regulators to pursue those who question him”) to name a few.
Adani Group Chairman and founder Gautam Adani is the third richest man in the world; at one point he was second, just behind Elon Musk. Wait scratch that, he was the third richest man in the world up until recently. He lost $36 billion of his net worth in January, the most of any billionaire tracked by Bloomberg.
We are not here to discuss the entire Hindenburg report and its accusations. We are here to talk about how Hindenburg sniffed out Adani’s audit firm and what it found.
From the report:
The independent auditor for Adani Enterprises and Adani Total Gas is a tiny firm called Shah Dhandharia. Shah Dhandharia seems to have no current website. Historical archives of its website show that it had only 4 partners and 11 employees. Records show it pays INR 32,000 (U.S. $435 in 2021) in monthly office rent. The only other listed entity we found that it audits has a market capitalization of about INR 640 million (U.S. $7.8 million).
Shah Dhandharia hardly seems capable of complex audit work. Adani Enterprises alone has 156 subsidiaries and many more joint ventures and affiliates, for example. Further, Adani’s 7 key listed entities collectively have 578 subsidiaries and have engaged in a total of 6,025 separate related-party transactions in fiscal year 2022 alone, per BSE disclosures.
The audit partners at Shah Dhandharia who respectively signed off on Adani Enterprises and Adani Total Gas’ annual audits were as young as 24 and 23 years old when they began approving the audits. They were essentially fresh out of school, hardly in a position to scrutinize and hold to account the financials of some of the largest companies in the country, run by one of its most powerful individuals.
Hindenburg backs up these claims with copies of the auditors’ IDs, Adani Group said publishing this information showed a “brazen disregard of personal privacy and safety.”
We won’t publish the IDs but we will show you this photo of what appears to be Shah Dhandharia offices.
At some point during Hindenburg’s two-year investigation into Adani Group, Shah Dhandharia’s website disappeared. Archived versions of the website as of February 2020 show that the firm was comprised of only four audit partners and seven support staff. Hindenburg found only one other client audited by Shah Dhandharia, a penny stock called Globe Textiles with a market cap of approximately INR 640 million (U.S. $7.8 million).
Said Adani Group in its 413 page response to the Hindenburg Research report [PDF]: “All these auditors who have been engaged by us have been duly certified and qualified by the relevant statutory bodies who are responsible to determine these benchmarks. All our auditors have been appointed in compliance with applicable laws.”
“The financials and public documents of the Adani portfolio entities clearly disclose Shah Dhandharia & Co as our auditor to all regulators and stakeholders and hence, it is unclear what new findings are being brought to light by Hindenburg,” said Adani.
“The truth of the matter is that Hindenburg is an unethical short seller. A short seller in the securities market books gain from the subsequent reduction in prices of shares. Hindenburg took “short positions” and then, to effect a downward spiral of share price and make a wrongful gain, Hindenburg published a document to manipulate and depress the price of stock, and create a false market,” Adani said. “Thus, the report is neither ‘independent’ nor ‘objective’ nor ‘well researched’.”
Hindenburg disclosed short positions through U.S.-traded bonds and non-Indian-traded derivative instruments in the opening of the report.
TotalEnergies, a large multinational energy company headquartered in France and investor in Adani Group entities since 2018, issued a statement earlier today saying it “welcomes the announcement by Adani to mandate one of the ‘big four’ accounting firms to carry out a general audit.” You’ll note that language is not the same as “a Big 4 firm has been engaged by Adani to perform an audit” but you knew that.
TotalEnergies’ investments in Adani’s entities were undertaken in full compliance with applicable – namely Indian – laws, and with TotalEnergies’ own internal governance processes. The due diligence, which were carried out to TotalEnergies’ satisfaction, were consistent with best practices, and all relevant material in the public domain was reviewed, including the detailed disclosures to regulators required under applicable laws.
The entities TotalEnergies has invested in with Adani are managed in accordance with applicable regulations. The day-to-day operations of the entities listed in India, Adani Total Gas Limited (ATGL) and Adani Green Energy Limited (AGEL), are managed by independent teams of professional managers, and their boards are composed of at least 50% independent and non-executive directors (5/9 for ATGL and 5/10 for AGEL). S. R. Batliboi & Co. LLP, a member company of the international financial audit firm EY is AGEL’s statutory auditor.
The following table lists TotalEnergies’ current stakes in ventures with Adani:
Adani Total Private Limited 50% Adani Total Gas Limited (cotée) 37.4% Adani Green Energy Limited (cotée) 19.75% AGEL23 50%
TotalEnergies’ exposure resulting from these stakes is limited, as it represents 2.4% ($3.1 billion at December 31, 2022) of the Company’s capital employed and only $180 million of net operating income in 2022. These investments being accounted for under the equity method, TotalEnergies has not performed any re-evaluation in its accounts of its stakes in the listed entities ATGL and AGEL in relation to the increase in their stock values.
CNN said Adani Group declined to comment on whether it was planning to appoint one of the Big 4 accounting firms as auditor. CNN also contacted all four firms, none responded immediately to a request for comment. Would firms even touch this?
Read the full Hindenburg Research report here.