Backlash against Gandhi

Gandhi, the scion of the Congress party, is facing severe criticism for his unabated support of the allegations raised by Hindenburg, a US-based short-selling company, against SEBI, the Indian stock market regulator.

To endorse the report released on 11 August 2024, Gandhi provoked a backlash from citizens, investors, and political figures. Since the Congress party assumed the role of opposition, Gandhi and his allies have consistently challenged the ruling BJP government, often placing blame even when it’s not warranted.

Aligning with a foreign entity and a short-selling firm that previously failed in India, Gandhi and the Congress party are now being criticised for what many perceive as an attempt to undermine the credibility of India’s financial markets.

Following the allegations from the Hindenburg report against the Securities and Exchange Board of India (SEBI) chairperson on 10 August 2024, Gandhi took to his official X account to cast doubt on the integrity of the Indian stock market. Many saw this move as a blatant attempt to erode confidence in the country’s economy.

Congress misinformation against SEBI

On his X account, Gandhi remarked, “The integrity of SEBI, the securities regulator entrusted with safeguarding the wealth of small retail investors, has been gravely compromised by the allegations against its Chairperson. Honest investors nationwide have pressing questions for the government: – Why hasn’t SEBI Chairperson Madhabi Puri Buch resigned yet? – If investors lose their hard-earned money, who will be held accountable—PM Modi, the SEBI Chairperson, or Gautam Adani? – In light of the new and very serious allegations that have surfaced, will the Supreme Court look into this matter suo moto once again? It is now abundantly clear why Prime Minister Modi is so afraid of a JPC probe and what it might reveal.” 

Adding a video message, he said,  “Imagine you are watching the International cricket match, between India and Australia…and every single person is watching the match and those playing the match know that the umpire is compromised… what would happen to the match…what would happen to the fairness of the match…what would happen to the outcomes…How would you feel as somebody participating in the match… this is exactly what is happening in the Indian stock markets…over the last few years larger and larger number of people have been investing in the Indian stock markets. They invest their hard-earned, honestly earned savings in the stock market and it is my duty as the Leader of the Opposition to bring to your notice that there’s a significant risk in the Indian stock market because the institution that governs the stock markets is compromised.

Now I will explain to you exactly how and why it is compromised. A serious allegation against the Adani Group was illegal share ownership and price manipulation using offshore funds. It has now emerged that SEBI Chairwoman Madhabi Buch and her husband were interested in one of those funds. This is an explosive allegation because it alleges that the umpire herself is compromised, and the savings of billions of Indians, both hard-earned and honestly earned, are at risk. It is, therefore, imperative that this matter be investigated. Retail investors, Honest investors, and Pensioners have three questions: why hasn’t SEBI Chairperson Madhabi Puri Buch resigned yet? – If investors lose their hard-earned money, who will be held accountable—PM Modi, the SEBI Chairperson, or Gautam Adani? – In light of the new and very serious allegations that have surfaced, will the Supreme Court look into this matter suo moto once again? It is abundantly clear why Prime Minister Modi is so afraid of a JPC probe and what it might reveal.”

The integrity of SEBI, the securities regulator entrusted with safeguarding the wealth of small retail investors, has been gravely compromised by the allegations against its Chairperson.

Honest investors across the country have pressing questions for the government:

– Why… pic.twitter.com/vZlEl8Qb4b

— Rahul Gandhi (@RahulGandhi) August 11, 2024

Why Rahul Gandhi Is A Hypocrite

In a striking display of hypocrisy, Gandhi advises investors to stay away from the Indian stock market. He is casting doubt on its stability, which indirectly benefits foreign entities. However, his personal financial interests reveal a different story.

According to his election affidavit for the 2024 Lok Sabha elections, Gandhi holds investments worth ₹8,32,05,831 ~8 crore in bonds, debentures, and shares within the Indian stock market. Notably, 42% of his declared assets are invested in Indian markets, reflecting his personal confidence in their performance.

He is a hypocrite for stopping Indians from benefitting from a market that is giving him good returns on his investments.

Gandhi’s investments include shares (₹4.3 crores), mutual funds (₹3.8 crores), and gold bonds (₹15 lakh). His movable assets have surged by 59% since 2019, underscoring the strength of the Indian markets he publicly criticises. 

Here is a snapshot of his investments:

• Young Indian: 1,900 equity shares of ₹100 each – ₹1,90,000
• Alkyl Amines Chemical Ltd: 373 shares – ₹7,39,211
• Asian Paints Ltd: 1,231 shares – ₹35,29,954
• Bajaj Finance Ltd: 551 shares – ₹35,89,407
• Deepak Nitrite Ltd: 568 shares – ₹11,92,033
• Dr. Lal Pathlabs Ltd: 516 shares – ₹10,43,429
• Fine Organic Industries Ltd: 211 shares – ₹8,56,301
• Divis Laboratories Ltd: 567 shares – ₹19,76,222
• Garware Technical Fibres Ltd: 508 shares – ₹16,43,075
• GMM Pfaudler Ltd: 1,121 shares – ₹14,00,073
• Hindustan Unilever Ltd: 1,161 shares – ₹27,02,460
• ICICI Bank Ltd: 2,299 shares – ₹24,83,725
• Info Edge (India) Ltd: 85 shares – ₹4,45,502
• Infosys Ltd: 870 shares – ₹14,21,580
• ITC Ltd: 3,093 shares – ₹12,96,276
• LTI Mindtree Ltd: 407 shares – ₹21,14,100
• Mold-Tek Packaging Ltd: 1,953 shares – ₹14,95,510
• Nestle India Ltd: 1,370 shares – ₹35,67,001
• Pidilite Industries Ltd: 1,474 shares – ₹42,27,432
• Suprajit Engineering Ltd: 4,068 shares – ₹16,65,439
• Tata Consultancy Services Ltd: 234 shares – ₹9,87,305
• Titan Company Ltd: 897 shares – ₹32,58,980
• Tube Investments Of India Ltd: 340 shares – ₹12,10,621
• Vertoz Advertising Ltd: 260 shares – ₹1,89,085
• Vinyl Chemicals (India) Ltd: 960 shares – ₹3,24,240
• Britannia Industries Ltd: 5.5 NCD – ₹1,558
• HDFC MCOP DP GR: ₹19,58,249
• HDFC Small Cap DP GR: ₹17,89,032
• ICICI EQ&DF D Growth: ₹19,03,179
• PPFAS FCF D Growth: ₹19,76,536
• HDFC Small Cap Reg-G: ₹1,23,85,545
• HDFC Hybrid Debt Fund-G: ₹79,01,329
• ICICI Prudential Reg Savings-G: ₹1,02,19,702
• Sovereign Gold Bond: 220 units – ₹15,21,740

Investments of @RahulGandhi in Sharemarket as per his affidavit filed with Election Commission during Lok Sabha 2024 is more than ₹4.33 Crore.

Why don’t he sell them before asking others not invest in Indian Stock Market?! pic.twitter.com/RCi7pQiqaV

— Shashank Shekhar Jha (@shashank_ssj) August 11, 2024

Agenda 2.0 – Hindenburg Research Report

On 10 August 2024, the US-based short-seller Hindenburg Research made serious allegations against Madhabi Puri Buch, the chairperson of the Securities and Exchange Board of India (SEBI), and her husband, Dhaval Buch. The report claims that the Buchs held stakes in obscure offshore funds involved in the Adani Group’s alleged financial misconduct.

According to Hindenburg, the Buchs were invested in a complex offshore fund structure linked to high-risk jurisdictions and overseen by a company with connections to the Wirecard scandal. Gautam Adani’s brother, Vinod, reportedly used these funds to manipulate financial markets. The report also suggests that shortly before Madhabi Buch’s appointment to SEBI, her husband shifted their investments into his sole ownership, potentially to evade scrutiny related to her new regulatory position.

Madhabi Puri Buch has vehemently denied these allegations, labeling them as a “sad case of character assassination” and asserting that their financial dealings are fully transparent. The Adani Group also rejected claims of commercial relationships with individuals or issues highlighted in the report.

The Supreme Court had earlier dismissed calls for a CBI or court-monitored probe into the Adani-Hindenburg matter, expressing confidence in SEBI’s investigation.

This new revelation follows a previous Hindenburg report from 18 months ago, which accused the Adani Group of stock manipulation and accounting fraud—a claim the conglomerate has denied. But the US-based firm, unexpectedly earned only $4.1 million from betting against Adani Group securities. This amount is insufficient to cover their research costs. Critics argue that, in light of this, Hindenburg may be resorting to fresh allegations against SEBI’s independence and integrity as a new strategy to justify their earlier claims.

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Hindenburg was largely known only to a small number of people in India, from its crash at New Jersey in 1937, until a fortnight ago when it brought about crash in the share prices of Adani Group in India.

They wrote a scathing report with largely known issues and shared with a few privileged clients before releasing it in the public domain. I am not interested in examining the merit of the charges or comments or conclusions made in the report, but making an attempt to present a balanced view on the larger issues that this saga has raised without letting any bias cloud our judgement.

But before that, it is important to understand the business of short-selling which the likes of Hindenburg specialize in.

Shortselling: Is It Legal And Ethical?

Shortselling is not an illegal or unethical practice. Just like investors have a positive view (Bull) on a company or its shares or bonds, there are people that have a negative view (Bear) and want to benefit from a fall in the stock or bond prices. So a short-seller looks for vulnerabilities to exploit. Most short sellers go silent after taking a position and wait for it to play out. Have you heard of Paulsen & Co or Mike Burry that made a fortune during the sub-prime mortgage crisis in US? Probably not, as they went about their jobs. And they were not questioned for betting against the “American Dream”. And we have had our own short sellers in the past like Manu Mundra and it is said that Big Bull Rakesh Jhunjhunwala also practiced short selling, before he started to believe in India’s growth story!

Usually short selling keeps the market valuations fair and helps in maintaining a balance. As financialisation of savings take deeper root in India, it is essential for even the retail investors to generate healthy long term returns. As India grows as an economy and financial markets mature, we will have diverse set of investors that will play markets different than the typical buy and hold investor (or long – only). The investor community and our markets should be ready to handle that.

How Did Hindenburg Short? 

“short positions in Adani Group Companies through U.S.-traded bonds and non-Indian-traded derivatives, along with other non-Indian-traded reference securities”

To me this is the most interesting piece of the puzzle. While it is easy to identify vulnerable companies in India, its not easy to express a bearish view in in any emerging market security, given the inherent lack of liquidity. In this extant case, the short sellers have used the US traded bonds and derivatives (probably through buying what is called Credit Default Swaps or CDS, that grows in value when the credit risk increases). 

Adani USD was largely BBB-, meaning they belong to a category called high yield bonds that rarely trade and if they trade USD 10 million in a month, it’s a surprise. The bond markets operate through broker-dealer and faith is critical. When some broker calls you and says he has a seller, the first question is – who is the seller – Is it a hedge fund, bond fund, HNI etc? And the secon question is – Why is he selling?. The motivation of a seller is critical, which makes it difficult to short sell at scale.

Another suggestions that it could be a large Over The Counter (OTC) position is little stretched, as it would be imprudent for a bank to take a large exposure and selling down the position is difficult. Hence my guess is the short position on Adani bonds is likely to be small and in the range of USD 10-15 mn (lets say ₹100 cr). Anything above, I would be surprised. And for all practical purposes, this could be lot lower.

In my view, the short seller might have created short positions in ADRs (American Depository Receipts) of Indian entities or ETFs (Exchange Traded Funds), probably hoping to benefit from a spill over or a mass hysteria. Most commentators suggest that there was nothing new in the long research note and most issues have been raised by various Indian media outlets over the last couple of years.

Why The Bloodbath Happened?

There could be multiple reasons and we would never know why in the clearest sense and it will remain a folklore, where you will have somebody that you know knowing someone that they know that did something. But some simplistic reasons could be panic selling by Indian holders, some selling to subscribe FPO (economically speaking, partly paid shares are better to own than fully paid shares) or it could be margin calls, considering the meteoric rise and the fall in the stock prices or any other reason. 

This saga has raised lot of important questions and we look at some of them below.

The Capital Market Strategy Of Adani Group

 While it was necessary to raise equity capital, the choice of FPO (Remember this is a partly paid share and not the same as the one that is currently listed) as a route suggests that they might have missed reading the markets. Most of the recent PP issues were done at a deep discount (Reliance in 2020 or Bharti Airtel in 2021). While a rights issue offer a significant pricing flexibility, an FPO does not. A retail issue of this size – ₹6000 cr (30% of issue size) needed effective marketing but we did not see much by way of that!

The ideal structure should have been a rights issue at a deep discount, that promoters could have renounced through sale of entitlements in markets. This could have helped as the retail investors might have participated and promoters could have used it to reduce their stake as well as reduce leverage.

What Can Adani Do Now?

They need to build investor confidence quick and fast. They can consider to bring in strategic investor in quality, cashflow generating businesses they own. Another alternative will be to buyback some of the USD bonds to comfort the investors. 

Irrespective of the outcome, there will be a growth slowdown in Adani, as their access to markets will be tricky and they may need to postpone some of their investment plans. It also gives them an opportunity to carryout a strategic analysis of businesses and exit any non-core investments, which will also help them reduce debt.

The common issue that has hurt over the last few years is financing promoters through what is called as “Loan Against Securities or LAS”. While most companies maintain debt at low levels in the operating entities, LAS introduces an element of leverage at promoter’s holding company, which adds to the risks in bear markets and makes the group vulnerable. Any reduction in promoter LAS will be a welcome change.

Is There A Contagion Risks To Indian Banks

While I would have thought that its possible a few years ago, the same is not the case today. The banks are clean and looking to expand credit. The exposure of the Indian banks to Adani as a percentage of all bank loans is less than 1% and this is an issue specific to the group and not a systemic issue. To add to that most of the loans in India are to the operating companies in India with many of them generating cash flows and prompt in servicing debt. 

What Should Retail Investors Do?

Most Mutual Funds in India, have emerged winners in this just by staying away investing in Adani group companies. Although its difficult to say where the stock price rout may end, retail investors should take cues from institutional investors when investing in troubled times and will do well not to blindly follow ultra HNIs as their risk tolerance and ability to handle a loss is very different!

Implications For Other Overseas Issuers

Most Indian companies are seasoned issuers in overseas  bond markets. Not too long ago, in 2007, India companies were one of the largest FCCB issuers. This saga is a clarion call as the overseas markets may hold them to a higher governance level than what is required by law. In addition they will need to understand the modality of shorting employed by Hindenburg or its clients as well as consider the outcome of this saga in their decisions in future. 

What Should The Government Do

The government did nothing, while the Finance Secretary (in his personal capacity) left it to markets and Adani to sort it out. They did what they had to do – just remain on the sidelines, as Adani scrambled to halt the damage. This was probably the best response the government could have come up with, as anything else could be seen as cronyism.

In the budget of 2019, a proposal for increase of free float (public ownership of listed companies) to 35% (from 25%) was mooted by Finance Minster Nirmala Sitharaman. While the proposal metb with resistance at that point in time, its probably time to consider implementing it now. Larger free float could help keep valuations in the fair zone as well and absorb the investment flows due to financialisation of savings. A crisis or even a semblance of one cannot go unutilised.

Both RBI and SEBI while reaffirming that the system is strong, stayed away from any punitive action against the messenger. Allowing market forces to prevail improves the perception of the market in the eyes of an investor. When an investor commits capital into an EM, they are aware of the risks too, but do not expect the regulator or governments to step in to prevent losses! They need stable and predictable regulatory and tax regime and would appreciate the role played here, contrary to what commentators think. 

The message was clear and loud – while the system remains strong, the market will decide the fate of the short seller and the issuer – laissez faire at its best!

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Disclaimer: I have no interest in any of Adani’s stocks and I do not hold them in personal capacity

US-based investment research firm Hindenburg Research, had recently published a report alleging stock manipulation and accounting fraud by Adani Group.

In its recent report on Adani conglomerate, Hindenburg Research said “We have uncovered evidence of brazen accounting fraud, stock manipulation and money laundering at Adani, taking place over the course of decades. Adani has pulled off this gargantuan feat with the help of enablers in government and a cottage industry of international companies that facilitate these activities,”.

The entire Hindenburg report comes to a 100 pages when saved as a pdf. On going through the report, one wonders why would this take two full years to publish unless the Hindenburg guys had multiple other projects to work on in parallel. A similar type of research on any conglomerate in the world would yield similar results. SEBI investigations and other charges against Adani is all known to the markets. So, there’s nothing unique in the Hindenburg’s findings to go gaga about. 

The phrase “stock manipulation” is used frequently and we do not know in which category this “manipulation” come under. There is very little reason to believe that this is some anti-India propaganda. People can spin whatever they want but this is purely driven by earnings money through the “short” trade no matter. As simple as that.

The allegation that Adani has been using offshore investment vehicles/funds to buy his companies and inflate his stock prices is nothing new in companies with hard physical assets. Rio Tinto, Shell, Samsung can be called out for the same. Not sure what is illegal with respect to Adani though!

Also, the timing of the release seems dubious, especially when Adani is looking to raise capital. The Hindenburg Research report came just two days before Adani Enterprises’ Follow-on Public Offer (FPO) of ₹20,000 crore, the biggest ever FPO in India, was scheduled to open for subscription on 27 January 2023.

Consider this – Company A run the largest port chain in India and makes enough cash to pay dividends. Company A legally takes the money outside the country and start a company in a tax haven and invest in a fund which in turn buys the shares of the port chain. If there is a law that prevents this, then the owner of Company A need to be behind the bars. If the money is somehow linked to owner of Company A and accusing him of holding 75%+ stake in the company, then yes he should pay for it. But, when neither of this is established, then there simply is no issue. “Anonymous” person’s scoop is all hogwash, anyone can say anything and say “anonymous” person. Moving assets between these shell companies is something that all conglomerates do. Violations are what we need to focus on: “related party transaction disclosure” being the most obvious one. But, if there are “unrelated” entities not sure how they might be related parties.

Issues regarding the auditors seems genuine in terms of capability but then there are no regulations that say that auditors who are in their 20s cannot sign off on financials or there isn’t any stipulation by the CA institute on these lines.

The true intentions of of Hindenburg can be found in its disclaimer. Hindenberg has a reputation for specializing in ‘short-selling’. Short-sellers are those investors who bet against a certain stock and borrow them from a party, ‘short’ them and later sell it at other exchanges to buy them back at a lower price to return to the lender, pocketing a profit in the process.

Lastly, India’s economy is not held back by broken capital markets. This is a low resolution argument.If Indian economy were held back by broken capital markets then neither FIIs would’ve come to India nor would you have a domestic mutual fund industry that has approxiimately ₹40 lakh crores of Assets Under Management.

The only thing that definitely makes some sense is the valuation argument. Yes, the stocks trade a high multiples. But, the onus is on the investor, they can buy or stay away. The promoter pledges are no big deal and won’t create any issue.

The trope that “Adani is silencing journos/analysts” is just an insurance policy for Hindenburg to escape in case no one buys these findings.

Perhaps, the general public is hearing all of this for the first time and is getting swayed by all the hullaballoo generated by media. The common investor, public, citizens aren’t scared of Adani.

For them, they just want to invest in a stock and make money. It could be Adani or Tata or Ambani. The only ones who have issues are a few “activist-journalists”, “activist-analysts” like Hindenburg and ofcourse Opposition politicians.

This article is based on the Twitter thread of Kishore Iyer.

I went through the entire #HindenburgReport (comes to 100 pages if you try to save it as a pdf)

My first set of observations:

1. I don't know why this would take 2 years to publish this report unless you had multiple other projects to work on in parallel

— KishoreIyer (@KishoreIyer5) January 27, 2023

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Amid the pall of gloom over the losses incurred due to COVID-19, there is good news for the Indian economy because foreign investors are betting big on the net inflows into the Indian equities.

As per a report in Economic Times, Foreign portfolio investors (FPI) pumped in ₹54,980 crore in Indian markets in December amidst availability of excess liquidity in global markets. Also, there is the expectation of a fresh stimulus package by various central banks.

According to reports, ₹48,858 crore have been invested into Indian equities, and ₹6,122 crore have been invested in the Indian debt segment.

Himanshu Srivastava, associate director – manager research, Morningstar India said, “availability of excess liquidity in global markets and low-interest rates diverted foreign flows into emerging markets like India.”

Harsh Jain, co-founder and COO at Groww said, “After months of buying a few select stocks, FPIs are beginning to broaden their horizon as buying in small and mid-cap space has increased,”.

November saw the whopping sum of ₹62,951 crore invested into Indian equity markets which was the highest-ever inflow of funds recorded ever in a single month.

Many market analysts think there is a positive outlook by investors towards India amid the drop in the number of COVID-19 cases and the successful vaccine development against COVID-19, both in India and the rest of the world.

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