Gautam Adani counterattacks. Can he win the war of perceptions?

Gautam Adani, the tycoon attacked by a New York-based short seller, outplayed his accuser 4:1: The rebuttal released by his group Sunday night in India runs to 413 pages. Hindenburg Research’s allegations of stock price manipulation and accounting fraud were contained in a 106-page report, which has now been denounced by the conglomerate as “nothing less than calculated securities fraud under the applicable law”. Is the answer, underpinned by the assertion that the group can seek redress, as heavy as it is voluminous? Maybe it doesn’t really matter.

Indeed, the fate of Adani’s vast business empire will be decided by what looks like a rounding error for one of the world’s richest businessmen: in the ongoing $200 billion public offering rupees ($2.5 billion) from the group’s flagship, big anchor investors have already been allotted about 60 billion rupees worth of shares at the upper end of the price per share range of 3,112 rupees to 3,276 rupees. But following the Hindenburg report, the action of Adani Enterprises Ltd. plunged almost 20% over two trading days last week and closed at just over 2,761 rupees on Friday. (Shares rose 10% in early trading in Mumbai on Monday.)

In other words, the company is asking investors to buy something that is available in the market at a lower cost. Institutions and wealthy individuals could still reclaim the quotas allocated to them, a failure to sell shares could shake investor confidence in India and cause huge collateral damage to the rest of their portfolio. The only constituency that remains to be convinced is retail, which needs to put up 70 billion rupees, or less than a billion dollars.

Even if there are a few small investors who want to make up their minds after digesting Adani’s answers to the 88 questions posed by the short seller, chances are they can’t. At least not by Tuesday, at the closing of the public offer in India. They have to take a leap of faith by ignoring the beat price. They will assume that professional investors, analysts and the media assess the evidence. But with Hindenburg offering another memo, in which he says Adani didn’t specifically answer 62 of his 88 questions, there’s just too much information to process quickly. This will force people to judge the situation based on their previous political beliefs. “Fraud cannot be masked by nationalism,” says Hindenburg. Nationalism, however, can change the battle of perception. And that’s what matters right now.

If subscriptions roll in and the stock sell-off ends, the beleaguered Indian billionaire has time to breathe out the shorts. Most of the Indian market players I spoke with over the weekend believe the funding commitments will eventually materialize. Adani, at last count, was personally worth around $93 billion. As one seasoned investor in Indian markets said in a phone conversation, “How can Adani be the most powerful business tycoon in the country and not manage to raise less than a billion dollars? I can have one of these two opinions, not both.”

Still, it’s a tricky situation: Adani has denied reports that he was considering extending the public offering or lowering the issue price. These tactics could have ramifications beyond the stock markets. The businessman from Prime Minister Narendra Modi’s home state of Gujarat is a huge investor in ports, airports, roads, data centers, grain storage silos and farms sunscreens from India. The New Delhi government, which is seeking a final infrastructure boost in Wednesday’s annual budget, is expected to rethink its economic strategy ahead of next year’s general election if political opponents pounce on Modi. If the stock offering fails (or even falters), there could be a public outcry over the entanglement of state-owned banks and the country’s life insurer in tycoon debt and equity. with high leverage.

With so much to do on a single stock sale, it’s easy to see why Hindenburg released its report last week. It is unclear how important short positions are and who is behind them. Hindenburg’s report only reveals that they are offshore in “US-traded bonds and non-India-traded derivatives, as well as other non-India-traded benchmark securities.” This too is a smart strategy. In India, any bet on the fall of a share price must be implemented by borrowing shares: so-called naked short selling is not allowed. Company management can choose bearish bets and eliminate them. Holding a position for an indefinite period through local derivatives could also be prohibitively expensive.

Things can be much easier if, for example, a large overseas-based family office decides to put real money behind Hindenburg’s report outside of India. It could be sold short via a dollar-denominated total return swap from the trading desk of a mid-sized international bank. (Big financial institutions may not want to jeopardize their Indian franchises for bespoke deals like these that could antagonize the regulator in India).

Whatever the modus operandi behind the short selling, so far it seems to be working: the group has lost $50 billion in market value in two trading days. Last week’s fall in its dollar bonds accelerated on Monday morning. Clearly, bond traders aren’t entirely convinced by the Adani Group’s response. Or maybe the fixed income market is also pricing in selling domestic equities, the one domino Adani can’t let go. All weapons are legitimate in what is shaping up to be an epic battle for public opinion – including information overload.

(Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He was previously a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.)

Disclaimer: These are the personal opinions of the author.

(Except for the title, this story has not been edited by NDTV staff and is published from a syndicated feed.)