How a report from Hindenburg Research is crashing India's Adani Group : The Indicator from Planet Money Gautam Adani is no longer Asia's richest man. Since American firm Hindenburg Research released a scathing report last month alleging widespread fraud, market manipulation and corruption, the head of India's Adani Group has lost billions. What does this all mean for India's economy?

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What does the Adani Group's crash mean for India's economy?

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And I'm Paddy Hirsch. The Adani Group, one of the biggest companies in the world, is still bleeding out this week after being badly wounded by the American investing group Hindenburg Research.

WOODS: Hindenburg released a report on January 24 claiming the Adani Group has flourished due to fraud and market manipulation and corruption. And they called it, I quote, "the largest con in corporate history."

HIRSCH: The largest con - boy, that's a high bar.

WOODS: There are a lot of competitors. I'm thinking about Fyre Festival. I'm thinking about FDX. I'm thinking about Bernie Madoff. There are a lot.

HIRSCH: Boy, you haven't even mentioned the banks yet.

WOODS: That's right.

HIRSCH: The Adani Group is one of India's largest conglomerates with significant interests in ports management and the extraction of coal and iron ore. They denied pretty much everything in the report, of course, but the damage was done.

WOODS: Stockholders have been falling over themselves to sell shares in the group's companies, and the group has lost more than $110 billion on paper. The group's founder, the self-made billionaire Gautam Adani, has himself lost $60 billion in net worth.

HIRSCH: So much for Mr. Adani and his empire. But what about India? The country has been trying to reform its business and financial sectors to attract much needed foreign investment. This kind of shock doesn't help.

WOODS: On today's show, we will take a look at what the events over the last two weeks can tell us about the Indian business and financial environment and what the effect on the Indian economy could be.


HIRSCH: Now, before we book our passage to India, we should probably explain what Hindenburg Research actually did on January 24 and why. Now, Hindenburg has this reputation for sniffing out overlooked or ignored problems in publicly traded companies. And it makes money by publicizing those problems and then short selling the company's shares.

WOODS: Most of us, when we invest in a company, we bet on the company. We buy the company's shares in the expectation that the value of the shares will rise, and that's so that we can sell them later at a profit.

HIRSCH: Short sellers, on the other hand, bet against companies. They don't buy shares. Instead, they borrow them, and then they sell them, expecting the value to fall. When it does, they buy the shares back at the lower price, return them to the person they borrowed them from, and they pocket the difference.

WOODS: OK. This sounds like some pretty complicated slick dealing, but maybe you've got an example that will kind of clarify what's happening here.

HIRSCH: Well, hopefully, this analogy will show you what goes on in a short sale. Imagine you're a rare stamp trader, and you hear on the grapevine that the British post office has found in its archives a roll of a million unused Penny Black stamps first issued in 1840 - very rare, very expensive.

WOODS: Right. But because the British post office has found a lot, I presume these are going to be less valuable in the future.

HIRSCH: Absolutely right. Now, you're just one of a handful of people who knows about this little find. So you ask a friend of yours who has one of these unused Penny Blacks if you can borrow it. You then sell it to some poor, unsuspecting devil for $10,000.

WOODS: All right, $10,000 in your pocket.

HIRSCH: Very nice. And the next day, the news comes out that the Royal Mail has found a million more of these stamps, as you knew it would, and it will sell them to raise money because the Lord knows post offices need help these days. Obviously, the Penny Black stamps are a lot less rare than they were and therefore a lot less valuable. In fact, you can buy one now for just $5,000. So you do that, and you give the stamp back to your friend. And you pocket the 5K that you've got left.

WOODS: And that's exactly what Hindenburg did with the Adani Group shares. And it was absolutely transparent about it. In its report, it said Adani was a massive con, and by the way, we intend to profit from telling you this.

HIRSCH: Yeah. Which they presumably have done - shares in Adani Enterprises, the flagship company of the group, fell 55% after the report came out. In fact, trading in shares of five listed Adani firms was suspended not once but twice because they were falling so far so fast.

WOODS: And Mr. Adani himself will have to pay back more than a billion dollars' worth of loans because the collateral, shares in several Adani companies, have collapsed.

HIRSCH: So clearly Mr. Adani is in trouble. But what about India? The country competes fiercely with other emerging nations like Vietnam for foreign investment dollars, which means that it's under constant pressure to show that it's a safe place to invest. Surupa Gupta is a professor of political science and international affairs at the University of Mary Washington.

SURUPA GUPTA: This is the last thing India needed. If you are looking for foreign investment, then you also want to signal that the policies framework in the country is strong.

WOODS: The Adani meltdown has done just the opposite. Now, allegations about dodgy business practices have swirled around the Adani Group for years. Many have pointed the finger at Adani's close ties to the Indian prime minister, Narendra Modi, which means that much of the Hindenburg report is already known.

HIRSCH: But the report has collated and packaged these allegations, along with a few more, in a way that's thrown a fresh spotlight on several areas that always concern foreign investors - sweetheart dealing, opaque accounting practices, cronyism and, perhaps most importantly, problems with transparency.

GUPTA: There is a lack of transparency. International institutions such as the International Monetary Fund and others all say that there is need for more transparency. There are lots of problems in the financial sector. For example, Indian public sector banks seem to be overexposed to some of the risks by having lent to these corporate entities.

HIRSCH: Seem to be overexposed, but who can say? The Adani Group is so opaque that it was actually difficult for Hindenburg to get the kind of insight that it would have had had Adani been an American corporation.

GUPTA: Mr. Adani said he was going to sue Hindenburg. And Hindenburg had said that - yes, please do so, and sue us in American courts so that we can force you to open up your balance sheets and your books.

HIRSCH: Please sue us so that we can get the same view on you that we would get on, say, Apple - crazy.

WOODS: Yeah. Now, that's a sharp response. But while Surupa acknowledges that Indian companies may be less transparent than U.S. or European equivalents, she says that the Indian government has been working to change things.

HIRSCH: Yeah, banks have been consolidated, and regulators have been created and empowered. As for the concerns raised by the Hindenburg report about accounting practices and corporate governance...

GUPTA: I don't think this reflects on how all Indian companies are run because I think there are a number of companies that are run fairly well and that have done well internationally, and they have good management. And I don't know that I would say that this is an indication of an endemic problem in Indian corporate sector as a whole.

HIRSCH: It's still not clear how the Adani Group's problems might ripple through the Indian economy. The companies it owns are already deep in debt, and it will now be difficult for them to borrow the money that they need to grow more. But there are many other conglomerates in India, like the Tata Group or Reliance Industries, that are generally trusted by foreign investors and could step in.

WOODS: As for the financial system, the Reserve Bank of India announced that none of the nation's banks are overexposed to Adani, so the damage should be limited. Surupa says that with a bit of luck, this whole affair could actually benefit India.

GUPTA: India has not attracted as much foreign investment as it needs, partly because of lack of reforms. There's need for labor reforms. But I think that financial sector reforms are important for signaling that it is a safe place. A systemic shock like this would spur the government to do something. Depending on how much of the problems of Indian financial sector get exposed as a result of this particular incident, the government would have to act.

HIRSCH: Adani himself responded to the Hindenburg report saying that it was an attack on India. But Surupa says this is Mr. Adani's crisis not India's crisis. Maybe it could be India's opportunity.


WOODS: This episode was produced by Noah Glick with engineering firm Katherine Silva. Dylan Sloan checked the facts. Viet Le is our senior producer. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.

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