The ‘Shell Companies’ Shocker
HINDENBURG RED-FLAGS ADANIʼS ʻCONVOLUTED, INTERLINKED CORPORATE STRUCTUREʼ; THE GROUP SAYS SUCH ʻRING-FENCINGʼ TO FINANCE INFRA PROJECTS IS LEGAL
Hindenburg Research alleged that Gautam Adani’s elder brother Vinod Adani, through several close associates, managed a vast labyrinth of offshore shell entities, 38 of which were identified. It put several questions to the Adani Group regarding these firms and related-party transactions. Some of Hindenburg’s key allegations and Adani’s responses:
ALLEGATION: Websites of 13 Vinod Adani entities seemed like rudimentary efforts to demonstrate that they are operational. Many websites were formed on the exact same day and listed the same set of nonsensical services such as “consumption abroad” and “commercial presence”.
RESPONSE: Vinod Adani does not hold any managerial position in any Adani listed entity or subsidiaries and has no role in their dayto-day affairs. Any transactions by the Adani portfolio companies with any related party have been duly identified and disclosed as related-party transactions in compliance with Indian laws and have been carried out on arm’s length terms.
ALLEGATION: Adani has a convoluted, interlinked corporate structure. The group’s seven key listed entities collectively have 578 subsidiaries and have engaged in 6,025 separate related-party transactions in FY22 alone, per the BSE disclosures. RESPONSE: For infrastructure business in India and many other jurisdictions, companies typically have to operate with a ringfenced project finance structure, wherein each project is housed in a separate company and financing is raised against the specific project assets. Banks and financial institutions also prefer this structure as it provides bankruptcy remoteness.
ALLEGATION: Recent right-to-information requests confirm that Sebi is investigating Adanis’ foreign fund stock ownership.
RESPONSE: In a June 14, 2021 letter to the BSE and NSE, Adani had termed a media report “blatantly erroneous” and “done to deliberately mislead the investing community” after it alleged that the National Securities Depository had frozen the accounts of three foreign funds—Albula Investment Fund, Cresta Fund and APMS Investment Fund—holding shares in Adani companies. Adani Group said it had written confirmation from the registrar and the transfer agent clarifying that the demat accounts in which the funds held the company’s shares were not frozen.
ALLEGATION: Mauritius-based entities like APMS Investment Fund, Cresta Fund, LTS Investment Fund, Elara India Opportunities Fund and Opal Investments collectively and almost exclusively hold shares in Adani listed companies, totalling almost $8 billion (Rs 66,139 crore). The original source of funds for their investments in Adani companies is unclear.
RESPONSE: Each of the entities referenced in the queries above are public shareholders in listed companies in the Adani portfolio. A listed entity neither has control over who buys/ sells/owns the publicly traded shares or how much volume is traded or the source of funds for such public shareholders nor is it required to have such information for its public shareholders under Indian laws.
ALLEGATION: In 2019, Adani Green Energy Ltd (AGEL) completed two offers for sale (OFS) that were critical for ensuring its public shareholders were above the 25 per cent listing threshold requirement. Portions of these OFS deals were sold to offshore entities, including ones in Mauritius and Cyprus.
RESPONSE: Under Indian laws, all listed entities are required to have a public shareholding of a minimum of 25 per cent. Since the shares of AGEL got listed after the demerger from AEL in June 2018, AGEL was required to comply with the requirements of regulation 38 [pertaining to minimum shareholding] within 12 months from the date of listing thereof. The process for OFS is a regulated one implemented through an automated order book matching process on the platform of the stock exchange.
ALLEGATION: A secretive Mauritius entity called Growmore Trade and Investment netted an overnight $423 million (Rs 3,497 crore) gain through a stock merger with Adani Power. According to court records, Growmore is controlled by Chang Chung-Ling, an individual who shared a residential address with Vinod Adani and had been named in DRI fraud allegations as director of a key intermediary entity used to siphon funds out of Adani Enterprises.
RESPONSE: The stock merger referred to in the allegation was undertaken after following due process as per the Companies Act and all applicable regulations, including SEBI’s. The valuation for the stock merger was supported by reputed, independent third-party valuers—Ernst & Young provided the valuation report supported by a fairness opinion from ICICI Securities. ■