Sun Tzu’s wisdom in The Art of War highlights the importance of strategy and deception in conflict. The wisdom ensuing from those words shows that at times it is more important to understand the nature of the bow from which the arrow was shot, rather than the arrow itself. The recent Hindenburg report on Adani Enterprises Ltd on the eve of its follow-on public offering (FPO) has sparked a lot of controversy and speculation about the motives behind it. Some believe that it is simply a short-selling move by Hindenburg Research, while others think that there might be deeper motives and enmities at play. It is necessary to understand the impact that such an attack can have on a business house, especially one as big and influential as Adani. Curiously, much of the information contained in the report was already in the public domain, yet it was collated and released at a crucial moment, suggesting a deliberate effort to cause harm.
The investor, and consequently the market, is driven by two emotions, namely fear and greed. Investors can be easily swayed by either of these emotions, and if somehow both can be brought into play, then the investor is likely to act even more irrationally. And if they are not careful, they can end up harming their portfolios, the stability of the stock market, and even the economy as a whole. In such a scenario, if correct facts are disseminated the investors can end up not only harming their own portfolios, but also the stability of the entire stock market, and even the economy. Moreover, fear of loss is a particularly potent emotion in such scenarios, as people tend to be very risk averse when it comes to any kind of potential financial loss.
There have been many opinions and analyses of the situation that arose after the Hindenburg report. The Ingovern analysis released on January 27 sheds some light on the valuations and leverage that were central to the arguments in the Hindenburg report. It says, “Though the Hindenburg report talks of high valuations and over leverage by the Adani group, the nature of the industries in which Adani group companies operate and data on debt holding in Adani group companies indicate otherwise.” It further clarifies that the valuations are in the eyes of those who have a position and are willing to bet on it; the companies in the Adani group operate in infrastructure businesses with monopolistic characteristics and have the potential for significant cash flows; the low float of many Adani companies provides the group with the ability to sell equity to pay off debt and reduce leverage, and the FPO aims to increase the float and pay debt; according to a CLSA report, Indian banking exposure to the group is less than 40% of total group debt; and incremental funding to the group is mostly from outside India in the form of USD or Rupee bonds issued to overseas investors.
It should be noted that debt can be a useful tool if the return on investment is greater than the cost of debt. The invisible hand of the market is what drives the economy and ensures that the best interests of society, as a whole, are fulfilled. The constant interplay of individual pressures on market supply and demand causes the natural movement of prices and the flow of trade.
It is important to understand that Adani has been able to convince the investors at various stages, and will likely continue to do so. The stakeholders who have decided to provide funding to the group, such as equity, debt instruments, or loans, must have reviewed the investment prospects and established trust in the business potential and integrity of the Adani group.
One of the key things that such attacks can do is create fear and panic among investors. This is because attacks like these can spread rapidly through the power of information technology tools, which can weaponise information and spread it quickly to a large audience. The speed of change can also sometimes lead to a market accident that could have been avoided if things had moved at a slower pace. The Hindenburg report has resulted in significant collateral damage to the Indian financial ecosystem. The seed of mistrust it has planted about the critical components of the Indian financial system in the minds of stakeholders will have a long term impact on the competitiveness and viability of Indian organisations, leading to increased risk calculations for all Indian businesses. This will have a negative impact on the country's overall competitiveness in the global market. Therefore, it is crucial to be vigilant and aware of such attacks on Indian business houses. All stake holders in government and private sector must work together to decode the enemy, understand their game plan, and protect our businesses and the economy as a whole from further harm.
Sun Tzu's words ring true: “With many calculations, one can win; with few one cannot. How much less chance of victory has one who makes none at all.” We must not make calculations that indicate defeat, but instead use our strategic thinking to ensure the success and stability of our businesses and economy.
The author is a former Director of the CBI. Views are personal
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