Hindenburg Research’s attack on Indian conglomerate Adani Group has dominated financial news since it released its scathing report on 24 January. Hindenburg claimed that Adani is "Pulling The Largest Con In Corporate History" via a “brazen stock manipulation and accounting fraud scheme over the course of decades”. 

To make matters worse for Adani, the research landed while it was marketing a US$2.5 billion follow-on offering of shares in its flagship Adani Enterprises unit – a sale that has now been withdrawn. By last Friday, the market value of listed Adani Group companies had fallen by some $112 billion over less than two weeks.

Hindenburg’s ambush raises at least two questions. There’s an obvious ethical one: when is it justified for a short seller to attack the integrity of a company? The answer to that is simple: when the short-seller is right. 

But no-one knows for sure whether they are right at first. It takes time – and often a judicial process – to establish beyond doubt whether allegations of fraud are accurate. Hindenburg also alleged fraud at US electric truck start-up Nikola in September 2020; founder Trevor Milton was convicted more than two years later. 

Sometimes this kind of clarity is never gained. Bill Ackman’s Pershing Square Capital ran one of the most famous shorts in modern times against Herbalife from 2013 to 2018, alleging that the US multi-level marketing firm was a pyramid scheme. But while Herbalife was shaken by the allegations and investigated, it never fell, and its share price recovered (Ackman still thinks Herbalife is a pyramid).

Clarity is critical

The second question, which Adani faces now, is about how a company should respond when it faces allegations of misconduct from a short-seller. When the truth about a company is contested in this way, I would argue that immediate clarity is critical. After the research hits the headlines, there is a short window of time – hours and days – in which perceptions are still fluid, and both parties have a chance to control prevailing narrative. When this window closes, perceptions start to crystalise. Then they are very hard to shift.

Adani’s immediate response to Hindenburg’s claims was furious and dismissive: the report was a “malicious combination of selective misinformation and stale, baseless and discredited allegations” and deliberately timed to damage the share offering, it said on 25 January.

As its shares sank further, Adani invoked patriotic sentiment. Hindenburg’s report was not just an attack one company, it said, but “a calculated attack on India, the independence, integrity and quality of Indian institutions, and the growth story and ambition of India.”

But Adani did not engage in detail with the substance of the short seller’s claims until last Sunday, 29 January. When it did, the company certainly won the war of words in one respect: its 413-page rebuttal was about four times as long as Hindenburg's report. 

As you would expect, Hindenburg immediately rebutted the rebuttal. Its statement, titled “Fraud Cannot Be Obfuscated By Nationalism Or A Bloated Response That Ignores Every Key Allegation We Raised,” requires little further explanation. But Hindenburg also demonstrated media nous by claiming that Adani failed to specifically answer 62 of its 88 questions, which is the kind of factoid certain to make it into stories.

Adani’s extended response didn’t move the needle. Shares continued to fall and, although it attracted enough subscriptions to go ahead, the company decided to withdraw the share offering. At this stage, chairman Gautam Adani released a video in an effort to speak directly with investors. It hasn’t helped much yet. 

Eviscerate or explain?

It's natural enough to retaliate when you are unexpectedly attacked. Trying to turn the fire back on to the short-seller is also understandable. Firms like Hindenburg that target individual companies are hardly popular: making money while many investors lose out, along with a degree of opacity about who else might be in on the trade, make them easy targets. There is also the argument that responding in detail to what you see as baseless allegations dignifies them in a way they don’t deserve, or signals fear.

But simply lashing out isn’t enough if you are trying to win a battle of narratives about the integrity of a company. Without question, the best strategy when you are the subject of allegations you believe to be unfounded is to show as quickly and as completely as possible why those allegations have no substance.

By attacking Hindenburg’s right to make the allegations and escalating the matter into an assault on India, Adani missed an opportunity to shape the narrative about the allegations while they were at their most contestable. A 413-page document certainly takes time to prepare, but such a weighty tome wasn’t necessary at first. A quicker, more concise and fact-rich statement that countered the core of Hindenburg’s claims would have ensured that the key questions weren’t simply left open, which worked to the short-seller’s advantage. 

No company expects to be the target of such an attack. But management teams should be honest with themselves about whether they are vulnerable. Companies with new and unproven technologies, those that are family-controlled, those that have recorded spectacular share price performance and those with complex ownership structures are most at risk. They need to anticipate the issues that a short seller may focus on and have counter-arguments prepared for immediate deployment.

Adani will be hoping for a quieter week ahead, and that the rout may just run out of steam as the news agenda moves on. But this affair is likely far from over. Hindenburg has said it would welcome the legal action Adani mooted and challenged the firm to file a suit in the US, saying it has a “long list of documents we would demand in a legal discovery process.” For now, Adani is struggling to regain the initiative in this battle for the truth because it can’t take Hindenburg’s questions off the table. For as long as uncertainty remains and Adani Group stocks continue to decline, Hindenburg is winning.

Adam Harper is founder/MD at Ashbury Communications