The Adani Saga: An Idiot’s Guide to shell companies and round-tripping

In a damning report, Hindenburg Research said the Adani companies were vastly overvalued and alleged that shell companies had invested in these companies through round-tripping.

Getty Images
Getty Images

Aditya Anand

The Adani Group has seven publicly listed companies and 578 subsidiaries, all of them allegedly controlled and managed by his family. These companies in January 2023 were valued at $200 billion, equal to the GDP of Qatar. The Adani group is said to have launched a staggering 270 companies since 2014, as many as 125 of which are allegedly based in London. In 2018, Gautam Adani’s net worth was estimated to be $20 billion, by 2022, it had soared to $120 billion, making him the third richest man in the world. In a damning report released on January 24, US-based Hindenburg Research said the Adani companies were vastly overvalued and alleged that shell companies had invested in these companies through round-tripping.

What are shell companies?

Shell companies are of two types. ‘Industrial shell stack’ companies buy capital assets such as machinery from the market and sell to listed companies at inflated prices. The excess (inflated) money received by the shell companies is then siphoned off to another group of shell companies or ‘investment shell stack’, which invest back in the listed companies.

Is this what is known as round-tripping?

Yes, this circular trading is called round-tripping and creates an impression of economic well-being and growth (because every company in the process gets to record revenue without any real growth or value). This perception increases the market value of the listed companies. As the market value goes up, so does the net worth of promoters. They then pledge their own inflated shares to financial institutions to secure more debt.

How are shell companies identified?

Shell companies often do not have a traceable offline or online presence. They do not reflect any activity online or on the ground. They do not have employees to match their investments. The companies often operate from the same registered addresses, their domain names registered on the same dates and with similar website templates. Besides these telltale signs, they often do not have any other concrete business or vendors.

Is the Hindenburg Research report a hit job?

The US-based Hindenburg Research is not the first entity to level allegations of stock market manipulation and other irregularities against the Adani group. Lok Sabha MP Mahua Moitra had raised the issue in Parliament and written to the government and stock market regulator Sebi demanding inquiries. Hindenburg Research also appears to have a formidable reputation on Wall Street and the response of international media suggests that their report is being taken seriously.

What are the corporate governance issues raised by Hindenburg? Besides accusing the elder brother of Gautam Adani of managing 38 shell companies based in Mauritius, Singapore, the Caribbean and Cayman Islands, Hindenburg has pointed out that the group’s Chief Financial Officer (CFO) has been changed five times in eight years. The current CFO is said to be an Australian citizen. The report also raised concerns about a small auditing firm in Ahmedabad, operating out of a small rented office, auditing Adani Enterprises and Adani Total Gas.

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