How to Lose $100 Billion in a Week

manipulation at a Danny highly incredible go to. Amadanni's businesses have now lost one eight billion dollars in a week after allegations of fraud and stock manipulation leveled by short seller Hindenburgh. I mean, really one of the most intriguing financial stories of the decade about an Indian business empire that had over a hundred billion dollars hundred billion dave wiped off its dark market. So it all kicked off. On the twenty four January, US activist short seller by

the name of Hindenburg Research released this bombshell report. Just a reminder, you know, an activist short seller bets on the prices of assets falling and then they go public with their claims to try to act really make that happen and it certainly has worked in the case of Hindenburg. Now a Donni Group has denied the claims. The Hindenberg research basically alleges that the Donna Group companies had engaged

in decades of brazen stock manipulation and accounting fraud. It's also claimed it's companies had a substantial debt which put the entire group on a precarious financial footing. Yeah, and the actual quote from Hindenburg is quite remarkable, and this is a quotation. They've called a Danni the largest con in corporate history. And as you said, fran Seeing, of course a Dannie vigorously denies those claims. But still investors fled and have to say it's a pretty damning report.

And a Dannie appears at some point a couple of days after these allegations in the video posted online to reassure investors everything will be fine for me, the invest of my investor. It is better amount and everything secondary. The fundamentals of our company are very strong. Our balance

it is healthy and Essex robust. Despite that attempt at reassurance, within just a week, the total market value of the group of a dining related companies and they've got holdings across a whole range of industries from energy to construction was wiped up by an enormous amount. I'm David Merritt and I'm Francine Laque and this is in the City, Bloombergs podcast, connecting you to the stories and the voices

at the heart of the City of London. This week we delve into the wider ramifications of the Danne Hindenberg clash nearly a month after the release of the report.

What's been the fallout for credit markets? What would it mean for the investor makeup in the region now and in the future, and could this clashed spur a wider short seller revival with us shually ran Bloomberg Opinion carmn this covering Asian markets and Tree video back to Assalam, Global executive editor overseeing global finance investing in legal coverage Tree. Could you stop also just by explaining a little bit about Adani and who they are and why they're so important.

I mean, I remember when I worked in Mumbai a decade ago. You know, it was a big company, but it wasn't as significant as it is now. Tell us a little bit about the history of this organization and of Danni himself. Adani has burst into sort of the consciousness in the past decade. As you say, it's a it's a good time for him to look at in terms of how you've seen this coming of age, if you will, of his empire and his group of companies.

You know, he was considered one of India's original coll barons. So his his DNA very much comes from the commodity side. He hails from Gujarat and one of the western states in India where the Prime Minister Narendra Modi also hails from. And that's a key connection, isn't it. That provenance of of Guara and their fates at and slightly entwined they not,

that's correct. And and in recent years Adani has sort of come to be viewed as a proxy in a way for this rising India, this emerging India, and he has very closely hued to Mody's own vision for you know, the ascent of this economy in a in a very big way. In recent years. You know, he has also branched out into everything from green energy to you know, more sustainable ways of doing business in a departure from

his roots on the commodity side. And and now, of course, you know, there was one point before Hindenburg's report became public when he was on track to be one of the world's richest men. He was Asia's richest man, and and he saw all of that sort of coming crashing down fairly quickly in the wake of Hindenburg's report. So shurely, what is Einenberg accusing Adania? So they are true things,

but the most important allegation is stock manipulation. According to India security security laws, stock has to be listed if less than twenty five percent of its total shares are

free flow basically are now controlled by company insiders. And then what Hindenburg was saying was that, you know, like the Adone family is using obscure overseas investment vehicles to buy into its stocks, and that in effect that they control more than seventy of its shares, and that they use their controlling power to manipulate the stock prices to let them sort by I don't know, two three percent

a year, And that's the most striking accusation. They also talked about into a corporate loans, which is actually pretty common among Asian conglomerates. So what it means is that if you're a big conglomerate, you use company as cash flow to pump into company B. So they also talked

about a little bit about that. I mean, so this narrative, I mean, it's so astonishing if anyone hasn't been following this again, anyone listening to this as shre was mentioned, the enormous creation of wealth around this company over a decade, tracking the rise of Moody and really kind of mirroring the emergence of India as an enormous world economy. Then to sort of pop and bust like this. Of course, the name Hindenburg is named after the famous exploding airship,

and that's really what's happened here. So not only this record creation of wealth, but then the destruction in a couple of weeks. I mean it's it was more than a hundred billion dollars of value evaporated. How is that being seen in India? Sri? Because if Adanni mirrored the rise of India, is this attack and this implosion of wealth being seen as a real attack on India as a whole. Some elements of that narrative have been apparent.

I mean Adani's own press releases and the statements coming out of the company have perceived this as an attack on India. There is a sense in those statements that he is being unfairly penalized. He has, by the way, rejected and refuted all of these allegations, so there's very much a sense in in some camps this is a short seller with some kind of an agenda to bring down the Indian sort of story. But there is a

counter narrative to that. Over the years, there have been several scandals, and you know, I would say compared to other investors, it's a sophisticated base of retail investors, and I think there is some actual worry playing out. A lot of wealth is tied up, not just Adanie's personal wealth, but retail wealth is tied up in the Indian stock market, So there is a good deal of worry about how this might affect personal retail wealth. Shouldly, you've been writing

a lot about the parallels with ever Grand. This is the big Chinese giants that really rippled through global markets. Is it worse than ever Grand? I mean, can you actually really drop parallels between the two. I'm pretty sure we enjoy the parallel. For instance, India's financial regulators have been coming out talking about the Indian banking system is exposure to Adani and then State Bank of India, access Bank, all these state owned banks that are coming out to

talk about the exposure. And we saw that with ever Grand already right, and then ever Grand was seen as symbolizing China's financial risks, while Adoni tells the tale of an aggressive over alleged over leverage conglomerates with poor corporate governance, and people are starting to see that in some other Indian conglomerates. Um. But I think in one sense Adani is a little bit worse than ever Grant in that it has managed to attract very prime blue chip global investors,

whereas ever Grand. Everyone knows where ever Grand was, and the surrounding the Evergrand over the years there was basically speculative hedgements and the special situation distress funds. So I think it's Adani for our is a big wake up call for global investment banks and the blue chip credit funds.

I think that's really interesting because of course there's a retail story for the investor in India and this kind of nationalist line, But this company was so big that its investors were all around the world, and you've written a fascinating piece about how this whole process means their investor base is shifting, and we're seeing now in the havoc amid those big sell off from the shares, different

sorts of investors coming in. Can you talk a little bit about that and what it means for the company's future. Adani is uh in many ways much better than ever Ground group in soliciting global funds. I'm just reading off Adonne's financial statement. That's what the company said themselves. As of March twenty twenty two. Out of its long term debt, eighteen percent came from global international banks, thirty seven percent came from bounds and most of that is all abounds.

Also foreign investors. Ever, Grand never had any of that. For instance, the global investment banks gave a Danny about one point five billion in margin longs that are pledged by data backed by Adoni's various stockholdings, and the company

had to buy back a lot of that. And also last year Adoni bark Seems Indian cemented business for or for six point five billion U S dollars and then the company only came up with one point five billion of cash, and the rest of it was to finance with bridge loans and mezzollien LANs arranged by global banks from like Barclay's to Deutsche Bank to a Sili group.

So these banks actually have a lot more exposure relatively speaking to Adoni than China ever Grand Group surely is there something that could be systemic here at this point actually pointed out there's you know, it has been easy to pinpoint where the pain has been. There are a handful of global banks that are caught up here. Now the extent of the leverage and the extent of some

of these margin loans isn't really fully public. And if if it does emerge through the course of whatever investigations that take place from here on now, or further digging from the short seller, that there is more leverage than we think there is, it could get larger. You already have the likes of MSCI who are contemplating removing these companies and the addane companies from its index, and that

will have a ripple effect around the world. So what you're essentially seeing as a multidimensional fallout that's rippled across the globe. I mean, it's an enormous amount of money, as I said earlier, to evaporate, and I just dive a little bit more into this research outfit, Hindenburg. It's run by this person called Nathan Anderson. We profiled him

this week in Bloomberg Business Week. I think one thing that occurs to me is, you know, this is an enormous company and we've just been talking about investors all around the world. Why did nobody has noticed this? If this proves correct, his hundred page report makes some very serious allegations which have been caused refuted by the company. But why does it take a short seller to shine a light like this onto our company of this size.

Many of these allegations have been made before, investigated by SEBI and other authorities in India and then subsequently dismissed. So it's not like investors weren't aware of some of these opaque vehicles that were lurking in the background. There have been stories in the press predating the Hindenburg report that talk about some of these companies that operate out

of Mauritius, some of these offshore vehicles. What Hindenberg did and by by Hindenberg's own admission in that hundred page report, they have been looking into this company for upwards of two years at this point. What they did was very systematically map out some of these relationships, some of these obscure holdings, and juxtaposed it really with how much we

don't know. You might recall with the case of wire Card, for instance, it did take a short seller report to not only uncover some of the issues with wire Card, but also galvanized German regulators into action. So in a way,

we're seeing short sellers almost emerge as the auditors. Where auditors have failed, the short sellers are coming in and doing the auditing work for them in a way right for the regulators could remember, I mean the wild Card cases, it was amazing if people don't know that this German company, and it was actually called up by a journalist as well, and the German regulator investigated the journalists at the Financial Times rather than the company or accused them of creating

this rumor. So why the regulators failing here to spot things at the short sellers are able to highlight? You know, is there a is there a regulatory problem that you mentioned Seby have investigated a dine in the past, but no one seems to have taken their clearing of the company seriously, right, that's right. It does speak to some fundamental lack of either its authority that regulators have is

it resources. In the case of wire Card, you know there was, as you say, the regulators were happy enough to accuse journalists of market manipulation but actively looked the other way. And and the auditors, I mean, I think something needs to be at about how strong controls are around the auditors, what they look at, whether there are disclosures that you know, past muster from the accounting and

auditing end that really shouldn't. So it does speak to the need for a more robust regulatory regime, not just in India but just worldwide. Really, surely we're a lot of these investors based are they foreign investors or are they Indian investors? That's the thing I think, going back to the point of why it takes this one short cellar, I think the problem with Adani is that if you just look at their financing, half of the money came

from international investors. And I'm sorry to say that, even though like those of us saying Asia know about all these allegations against a daily over the years, a lot of investors based in London and New York. They have been sleeping. So it's a sleep of the whale. Some of these some of these people and now and now now paying the price. Yes, yes, but some of the other investors coming in now you write about oak Tree Capital Management there and you know, an opportunity to firm

Davidson Kemal Capital Management. They're seeing an opportunity here, right, So is there actually an upside for for investors with the right appetite for risk here? Absolutely? I mean they are very experienced. Both funds are very experienced in terms of y Asians and conglomerates. Auktree very famously sees a large product land are of China Evergrand Ever Grand Group in Hong Kong. According to my sourcing, they're engaging in

the lawsuit with the Chinese government over this. That takes some That takes some nerve, I think, yes, over over uniting our Unit Group, which does a lot of presidente in pinks and manufacturing, uh you know campaign. But the point is these are very experienced the distressed hedge funds who have the appetite and basically the experience to go through all of that. Whereas in the past what we saw was you know, like some European wealth funds, for instance,

Norwegians wealth fund and its biggest pension. They basically just check the box and say, okay, Adani is doing green energy, let's buy into that. They didn't really knock into it. Mr Donne is not gonna want these investors on his books, right, I mean he's going to try and can you can you shape them off? Do you think? Well? I mean these investors they probably just were like Adny to buy back some bombs, right. They bought those bombs at seventy

cents a dollar. If Adani just bias for eight or ninety cents a dollar, they will be happy to go away. And I'm sure Adani family does not want those distressed hatch funds out of their back. Actually, we had one analysts say that, you know, the Sadani crisis could actually derail Moody's economic vision. I mean, that's that's a pretty punchy headline. Do you agree? I think so? I Mean the way I see a Danny is, you know, the whole industrial ambition is the public, private and partnership. Right

like with China, basically it's all public. The Chinese government took on a lot of that um it's uh stay owned companies books, whereas in India there is a public private partnership. But for for this partnership to work, the body and the adonney they have to get along right and the adoney cannot fail. And at this point the private part is failing a little bit, which makes that the next question is how will the Indian government finance all this infrastructure ambition. I do think it debils body

a little bit, if I may jump in there. We also had a very good story that moved on how HSBC, one of the biggest global banks with a huge footprint in UM, China and Hong Kong, is getting pretty big on India right now. And so you know, you do have to remember though that you know, while some investors are looking skeptical about the India story, there are still the demographics are good, you know, the growth story. You know,

some believe, you know, it's still intact. My own senses that there will be a turn of some sort where you'll see, you know, a more skittish base of investors say that this is too much risk for them and the due diligence isn't said work. There while in terms of how how deeply they have to drill down, you may find investors with appetite for risk spot this as a bit of an opportunity for them. Yeah, and perhaps is this a sign of kind of the maturing Indian

market in terms of global investors. Know, these sorts of things happen all around the world. You mentioned work Card, which was a German scandal, many examples of course in the United States. So maybe investors around the world you mentioned there was maybe a sleep at the wheel people now just getting a bit smarter about how to invest

the Indian market, I think so. I think some of it is also they got scared by China, by China's drama last year, right, so they decided to flee flee China, and then India was a very natural place for them to go to. And the but the India assets valuation has always been very high, right, But so they're willing to overlook a lot of the perhaps negative aspect, likes the corporate governance. They just fall into whatever whatever valuation.

And at this point it's a wake up court. They were saying, Okay, we're still looking India, but we need to be mindful of all the pay force as well. What kind of backlash are we seeing in India. I know there's there's been a couple of media company saying, look at the humbling of a Dani will be a test for the country's capitalism. Does this make or break the country? Adani had his own rebuttal upwards of four page rebuttal to the Hindenburg report, and I will quote

from that statement. The statement says, this is not merely an unwarranted attack on any specific company, but a calculated attack on India, the independence, integrity and quality of Indian institutions and the growth story and ambition of India. So you're very much seeing this through the lens of nationalism. Um. So this is very very deeply wrapped up with that sort of rhetoric. At this point, the government itself has not said anything about this. They've they've remained somewhat silent.

The opposition has raised some questions in the Arliament about this unfolding affair. So there is a sense though that from here on now, especially if the fallout gets worse, there is a sense that there's more money to be lost here, and there's some sort of undermining of the case for India's growth story, you will start to see that rhetoric start to change. I guess the question is at what point will the Indian regulators as well as

the Indian government say this is this is enough. We need to kind of address this head on should we just so to sum it up, putting what do you think the exposure of London is to a Donnie either through the investor base were also we saw Boris Johnson's brother having to resign from a firm that was linked to a Donny. So if you look at it, there

are three ways. So you have the banking exposure, you have the investment exposure, and then you have exposure that many people who are prominent in the city or move in prominent circles may have to the Adorni group of companies. On the banking side, I'd say, you know, you have Barclays Standard chartered. You know a lot of these banks have already been named as banks who have done business

with Adanni's group of companies in the past. And what this is going to test is their appetite to come back. We're already seeing some banks say that they don't want to be expanding these lending relationships and so I think you will start to see many of these banks back away from that sort of risk. On the investment side, you do see firms like Jupiter, for instance, they came

back during that share offering that was subsequently withdrawn. So there is still appetite among some of these UK institutions to invest in some of these securities. When it comes to these other entities that are incorporated in the city, Joe Johnson stepped down as director of this firm called Laura Capital. Not much as known about this firm. It's it builds itself as a full service investment bank. It

has raised funds for several Indian companies. It says that it has offices in New York, Singapore, many other locations around the world. And you have other personages attached to this, including Lord Magna Magna Desai, who is an Indian born academic and a former Labor Party politician. He is also a director of a Laura So there's a lot more connections in time that will surface about who Laura Capital is and what exactly the connection is for the entity

with other Adani companies. Thank you both so much. Thank you thanks for listening to this week's in the City will be back next week, but in the meantime, if you like our show, please head on over to Apple Podcasts or wherever you listen to podcasts and rate, review, and subscribe. This episode was hosted by me David Merritt's me fran sin Laqua, and it was produced by Summersodi. Additional editing by Blake Maples and special thanks to Shooty Wren and Shree. Video back to Batslam