A month ago, a newspaper did an exclusive story on how a college dropout became the third richest man in the world. While narrating his story, Gautam Adani regrets not completing his college education. “I was just 16 years old when I chose to give up my education and move to Mumbai,” he says. “A question I often get is if I have any regrets that I did not go to college. Reflecting on my life and the different turns it took, I -– now -– do believe that I would have benefited if I had finished college. While my early experiences made me wise, I now realise that formal education rapidly expands one’s knowledge.”

The story presents Adani as a first-generation entrepreneur, who began his journey by learning the trick of assorting diamonds. Going on, he recalls his first deal with a Japanese buyer when he earned a commission of Rs.10,000. By the time he turned 29, he had set up the largest global trading house. “I had turned 29 and had a full appreciation of the value of two dimensions that would define everything we did –- scale and speed,” he said.

The story is certainly inspiring for young budding entrepreneurs. Many might have imagined themselves rocking the world, the Adani way.

In less than a month, another story backed by two years' research is published. The story speaks about the strategies that were followed by Adani to become the largest trading house or the world's third richest person. The moment one reads this story, one would have understood what Adani meant by scale and speed!

In another couple of days, we come to know that Adani has been derailed from the list of the world’s top 10 richest people. Does it not sound unimaginable, more particularly when many would have been speculating that he might even grab the top-most position?

The derailing spree does not stop here. Adani Enterprises takes back its follow-on public offer (FPO) despite the fact that it was fully subscribed! The press release issued by the company reveals, “given the unprecedented situation and the current market volatility, the company aims to protect the interest of its investing community by returning the FPO proceeds and withdrawing the completed transaction.” 

The statement further mentioned that its “board felt that going ahead with the issue will not be morally correct!" However, the devil was in the details. Only 11 percent of the retail investors picked up the shares earmarked for them. Nearly 50 percent of the shares earmarked for the employees had no takers. In other words, it was a flop show, compelling Adani to call it off.

Now what made him lose his place in the list or how did the market become volatile in a matter of a few days? All this is interestingly revealed in the research report. The report is published by Hindenburg, a US-based research organisation specialising in forensic accounting, after extensive interviews with people who worked with Adani group and after going through thousands of documents and site visits in almost half a dozen countries. It has evidenced how Adani has “amassed a net worth of $120 billion, adding over $100 billion in the past three years largely through stock price appreciation in the group’s seven key listed companies, which have spiked an average of 819 percent in that period.”

It also reveals that several offshore shell companies were formed with no employees, addresses, phone numbers or meaningful online presence. Allegedly, these companies have been formed on the directions of Vinod Adani (Gautam Adani’s elder brother) or Adani’s close associates for rotating transactions, holding shares in the listed companies of Adani groups etc. The report also shows how the group tried to hide the nature of shell entities by forming various websites, showing only the pictures of the stock with no employees and even using similar “non-sensical services like consumption abroad and commercial presence”. In fact, these shell companies were used for stock manipulation and money laundering through Adani’s private companies onto the balance-sheets of the listed entities, basically to paint a picture of financially sound and healthy companies.

In India, every listed company is under an obligation to disclose the shareholdings of the promoters. At least 25 percent of the shareholdings must be held by the general public. These disclosures are mandatory to curb insider trading and for protecting the interest of the general public. The report says that four of the Adani’s listed companies are on the verge of delisting due to higher concentration of their shareholding with the promoters.

The report shows that many of the offshore entities (read shell companies) hold a major chunk of non-promoter holdings of Adani group’s stock with beneficial ownership, concealing the actual identity under the names of nominee directors. Now who is this hidden beneficiary? Quoting a few conversations, the report says that “it is obvious that Adani controls these shares”. Simply put, in the name of public money, these shares are actually held by these shell/offshore companies for protecting Adani’s interest. The report reveals the names of several such entities holding shares worth billions of dollars.  

Not only this, the report says that the government agencies were investigating four major money laundering cases with an estimated value of $17 billion in 2004-05. The money was allegedly siphoned off by Adani’s family members by creating fake documents, forged papers for import/export to “generate fake or illegitimate turnover to siphon money from the listed companies.”

Well, the Adani group issued a 413-page statement refuting the claims of Hindenburg research. The statement says, “this is not merely an unwarranted attack on any specific company but a calculated attack on India, the independence, integrity and quality of Indian institutions, and the growth story and ambition of India”. However, this statement did not help Adani to save its stock prices from a free fall. In fact, Adani lost $22 billion from his personal net worth during the last few days.

The entire episode raises a few questions on the functioning of our institutions which form the backbone of our financial markets, be it the Reserve Bank of India or the Securities Exchange Board of India. The story is not restricted to the Adani group alone. In fact, State Bank of India and Life Insurance Corporation, which enjoy a lot of faith in the general public, also hold shares in the Adani group and have suffered losses.

While the Hindenburg report restricts itself to the Adani group, this could just be a beginning of revelations. After all, it is not uncommon to hear about shell companies. There might be many more groups or conglomerates following similar methods for exploiting public money. Those who enjoy clout have been exploiting the loopholes in legal provisions to their advantage. Vijay Mallya and Nirav Modi are such examples.

Unfortunately, nothing much seems to have changed even after such high-profile frauds. The Hindenburg report should act as an eye-opener. Two weeks have passed since the report was made public. We have not heard a word from our regulators, at least till the time of writing this piece. Unofficial reports have been making rounds that SEBI has stepped up the scrutiny of the conglomerate’s transactions.

However, it requires deeper introspection, a closer look at the systemic loopholes and plugging them by suitable legal amendments in the interest of the general public. The regulators must act swiftly to control further damage. The story does remind us about the Asian financial crisis of the late 1990s or the global financial crisis of 2007-08.

At a time when India is presiding over G20, it is important to reiterate and reassure the global players and investors that our regulatory framework is nothing but the best and no one can take us for granted.

(The writer, a company secretary, can be reached at jassi.rai@gmail.com)