10 reasons why the crisis facing Gautam Adani, Asia's second richest man, is not over yet - Hans Lee

If you’re fully invested in Australian companies, you may have missed one of the world’s biggest business stories recently. But many other global investors are watching the Adani Group bribery case like a hawk; especially in India, where its president, Gautam Adani, is also one of the most powerful and influential figures in the country. New York Times He even described Mr. Adani as “essentially an extension of the Indian government.”

Yesterday, Mr Adani and two of his subordinates highlighted in the report said they had been cleared of those bribery charges. The announcement came directly from the stock exchange filing. Prepared by Adani Green Energy..

The men were charged by American prosecutors. bribing Indian government officials In exchange for advantageous terms on solar energy contracts that are expected to generate profits of more than $2 billion.

But before you think this story is over, Plato Investment Management’s Dr. David Allen and his trademark red flag system found 12 additional problems (in addition to the bribery case) that explain why the Adani Group story could go even further. If you’re interested in a story about influence, power, and what that means for investors, I recommend reading this story cover to cover.

Three of the men at the heart of the Adani Group, including Chairman Gautam Adani (centre)

Adani Group bribery case: A brief summary

Last Wednesday (November 20) US prosecutors charged Gautam Adani, his nephew Sagar Adani (who runs the Adani Green Energy business) and five other executives with deliberately misleading international investors as part of a bribery scheme. This is the second major governance crisis to hit the company in less than two years and follows a brief report from Hindenburg Research that made headlines around the world.

The claim alleged that the three men “devised a scheme to offer, authorize, make, and promise to pay bribes to Indian government officials.”

US prosecutors say initial claims include more than $250 million People in the Indian government were bribed as part of an alleged covert scheme while raising capital from investors.

However, as I mentioned in my introduction, Adani Group says that the charges have been removed. But the damage has already been done. Adani Group said US$55 billion was wiped off the market value of its 11 listed firms.

Why is this story important?

The target and consequences of this accusation cannot be underestimated. Adani Group builds and acquires shipping ports, factories and power plants, often under government contract or license. It runs airports and even owns a TV news channel. Adani Group’s market capitalization has increased by more than 1000% in the last five years alone.

Politically speaking, Gautam Adani is generally thought to have close ties with Indian Prime Minister Narendra Modi. critics often argue that Adani’s business growth is closely linked to Modi’s time in power.

The story also had consequences for other companies. GQG Partners (ASX: GQG). Shares of the Australian-listed fund manager sold off 19% on Thursday (November 21). While Mr. Adani was cleared of the charges, GQG’s shares were able to recoup only half of their losses. On the same day, GQG attempted to reassure investors by issuing a statement highlighting the following:

“Consistent with our portfolio construction guidelines, we note that GQG portfolios are diversified, with more than 90% of our clients’ assets invested in issuers unrelated to the Adani Group.”

Despite this, Adani is considered one of GQG Partners’ top-conviction stock picks and one of CIO Rajiv Jain’s biggest and most contrarian gambles in recent times.

However, the charges were dropped. So the story is over, right?

Dr David Allen, Plato Investment Management

Not that fast. Dr Allen found a number of other red flags that still existed within the Adani Group despite the bribery charges being dropped. The following are all the notes Allen provided us. Where included, resources are hyperlinked to each major red flag.

Note: Plato Global Alpha Fund (ASX: PGA1) holds neither long nor short positions in Adani companies as it does not invest in emerging markets.

1) Auditors report three main concerns:

Unexpected situations regarding taxes and lawsuits: The company faces ongoing litigation and claims regarding direct and indirect taxes as well as other legal actions. Evaluating provisions or contingent liabilities in these situations requires significant judgment due to complexity and uncertainty.
Corrections for revenue recognition and coal quality differences: Auditors emphasized the importance of accurately determining revenue and making adjustments for coal quality differences that involve critical estimates. Improper valuations can lead to misstatements of income.
Measurement of coal stock quantities: Given the significant value of coal inventory, accurate measurement of its quantity is crucial. Auditors noted that this measurement involves significant judgment and estimation, especially when evaluating inventory at ports or shipyards.

2) Even the auditor himself is unclear: In May 2023, Shah Dhandharia & Co., a small chartered accountancy firm based in Ahmedabad. LLP resigned as independent auditor of Adani Enterprises and Adani Total Gas Ltd. This resignation follows concerns, as highlighted, about the firm’s ability to oversee such large holdings. In the Hindenburg Research report.

3) Other Indian regulators have investigated Adani before: In October 2023, NFRA (National Financial Reporting Authority in India) initiated an investigation into audit firms associated with listed companies of Adani Group. This research aims to assess auditors’ compliance with regulatory standards and their role in approving the group’s financial statements.

4) Deloitte, a much more well-known auditorHe also resigned relatively recently: In August 2023, Deloitte resigned as auditor of Adani Ports and Special Economic Zone (APSEZ), citing concerns about transactions flagged in the Hindenburg report. Deloitte’s inability to obtain sufficient information to address these concerns led to his departure.

5) Audit expenses account for only 0.01% of the group’s total revenues; This is an objectively small number.

6) Adani Group saw a huge increase in its intangible assets “While not suggesting that manipulation has occurred, there are examples elsewhere where this is a sign of earnings manipulation, such as capitalization of costs, overstatement of asset valuations and goodwill inflation,” Allen said.

7) There is no independent president – Gautam Adani is the president.

8) Related party transactions – It is known that Adani Group buys and sells goods from its subsidiaries and affiliates. Securities and Exchange Board of India (SEBI) He has already called the company on this issue.

9) The alleged bribery case is itself a high-impact management incident and a red flag for Dr Allen’s system.

10) Very high environmental density: The company has a huge environmental impact relative to its revenues.

Adani Group bribery case: A brief summary

Why is this story important?

However, the charges were dropped. So the story is over, right?

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