Does Hindenburg’s Anderson Know What He’s Getting Into?

On Thursday, I characterized mainstream financial media coverage of the Gautam Adani “fraud” allegations as akin to click-bait. And make no mistake: That’s an accurate portrayal.

The Hindenburg (no relation) short is the kind of story that can become self-fulfilling, and that’s the best kind of story if you’re in the financial media business. Something causes a selloff today, breathless coverage amplifies the price action, that price action becomes tomorrow’s coverage and in cases where the initial selloff was predicated on rumors of malfeasance, the spiraling losses are taken by some market participants as validation of the original accusations.

Obviously, the media isn’t “wrong” to cover the market’s response to a short seller’s claims. When the target is one of the world’s richest people, you could easily argue media outlets would be derelict not to devote blanket coverage to the story. Relatedly, it’s certainly not journalists’ “fault” if that coverage perpetuates a selloff in related assets.

Still, it just is what it is. And what it is is fortuitous if you’re in the business of monetizing web traffic. To pretend otherwise is to be deliberately obtuse.

Now, on to more important questions. In the linked article above, I alluded to the notion that this story probably doesn’t come across as especially surprising to Indians. As regular readers will recall, I had a dear friend in India who died of pancreatic cancer a short time ago. If she were alive, she’d doubtlessly have something to say about this situation, and I imagine she’d suggest that the average person in India could write an executive summary of Hindenburg’s thesis without reading it. But they probably wouldn’t. And therein lies one potential problem.

The Adani story is spiraling, there’s some contagion risk to the local banking sector (more so for state banks) and, crucially, Hindenburg is wading deep into India’s domestic affairs.

Bill Ackman on Thursday lauded the Hindenburg thesis. “Adani’s response is the same as Herbalife’s response to our original 350-page presentation,” he said, in a tweet referencing Pershing Square’s Waterloo-esque crusade against the multi-level marketer. “I found the Hindenburg report highly credible and extremely well researched,” Ackman continued.

Ackman’s comparison was apples to oranges, to put it politely. Hindenburg is threatening India’s economic development model, flawed though it might be, and while many Westerners aren’t apprised of this, Narendra Modi, who’s famously close to Adani, isn’t a man with whom one wants to trifle.

Nathan Anderson (Hindenburg’s founder) seems apprised of the stakes, and also of the perils. “Criticism of India’s elite businessmen and politicians has increasingly resulted in journalists being imprisoned or outright murdered,” Anderson wrote, in the Adani report, adding that “stock market analysts have been arrested for writing negatively about companies.”

He assessed that “Adani has pulled off [accounting fraud, stock manipulation and money laundering] with the help of enablers in government.” He cited “numerous sources,” who indicated that India’s securities regulator “seems more inclined to protect the perpetrators than punish them.” Anderson also said related corruption “permeate[s] multiple layers” of the Indian government.

Plainly, he understands the inherent risks. But understanding them is something different from internalizing them. Adani hails from Gujarat. As the FT wrote, in a lengthy biographical piece called, aptly, “Modi’s Rockefeller,”

The meteoric rise of Mr. Adani started when he offered support to Mr. Modi in 2003. At the time, the politician — then chief minister of Gujarat — was being heavily criticized for failing to control violent riots that had rocked the state a year earlier. More than 1,000 people died, most of them Muslims, and Mr. Modi was being shunned by India’s business elite and the world — he was barred from entering the US for almost a decade until he became prime minister. But when some of the country’s most powerful tycoons grilled him onstage over the deaths at an event hosted by the Confederation of Indian Industry, Mr. Adani broke ranks with the old business elite, potentially risking his future for the under-fire politician.

If you’re not familiar with the riots FT mentioned, I’d encourage you to read “Blood And Soil In Narendra Modi’s India.” But only if you have a strong stomach. Suffice to say that episode was horrific. And by that, I mean it could’ve walked out of the worst nightmare you’ve ever had in your life.

To step in the middle of this, as Anderson did this week, is to tamper in power dynamics forged in death, religious controversy and bitter societal rifts. Already, his report has triggered calls from Modi’s domestic opposition for investigations into whether his government “may have exposed India’s financial system to systemic risks through liberal investments in the Adani Group made by strategic state entities.”

In a Bloomberg Opinion piece published Thursday, Andy Mukherjee wrote that “a rise in jingoistic nationalism has added a new element of impunity to the behavior of some corporate chiefs,” and said that the Hindenburg report “raises many questions about the integrity of the broader Indian market, which is caught between the pressures of financial globalization and political nationalism.”

A separate opinion piece, by Shuli Ren, hit on two key points in succession. “Unless Modi changes his ‘Make in India’ dream, short sellers do not have much of a catalyst,” she said, adding that, “many of Hindenburg’s complaints appear to focus on corporate governance… but this is a yawn to long-time emerging markets investors.”

Still another piece, by far the best of the bunch published this week by Bloomberg’s contributors, found Mihir Sharma writing that,

If Adani didn’t exist, the Indian government would have had to invent him: The development model we have now chosen requires risk-taking “national champions” such as the Adani Group. What else did you expect? After all, like so many others, India has turned away from traditional market-supporting structural reform in favor of old-fashioned industrial policy. Adani’s companies have not just been entrusted with a wide swathe of India’s infrastructure. They have become the government’s first choice as partners in multiple sectors that framers of our industrial policy have decided are priorities for India’s growth. Our worry is not where the Adani Group is picking up the capital in service of these ambitions. Nobody else in Modi’s India has this specific mixture of confidence in government support, ability to navigate byzantine regulations, and willingness to risk enormous sums of money. Some worry that Adani is too big to fail. He isn’t. But he may be too unique to fail.

I don’t know anything about Anderson other than what’s publicly available on his website, LinkedIn page and so on. But I do know quite a bit about Modi and even more about the extent to which nationalist demagogues have little in the way of patience for foreign interference in domestic affairs, particularly when those domestic affairs involve critical industries and matters deemed important to national pride and development.

It’s now seems very likely that Anderson’s report will be leveraged against Modi domestically, and Adani’s sway depends in no small part on Modi’s political fortunes. At the same time (and as detailed in the linked piece by Mihir Sharma), the trajectory of India’s development depends in no small part on Adani.

In case it’s somehow unclear what I’m suggesting, let me be a bit more direct: Many believe Anderson’s report broke little new ground, but rather represented, as I put it Thursday, a preexisting narrative repackaged as a thoroughgoing litany of allegations, rendered in granular detail. If that’s the case, the risk probably wasn’t worth whatever financial reward he might reap, no matter how large. He probably should’ve left this alone.

Anderson presented himself as a kind of savior. “A system is broken when corporate behemoths like Adani Group seem able run an intricate fraud in broad daylight and when ordinary citizens are terrified to speak out against those who use their power and wealth to suppress criticism,” he said. Hindenburg went on to heroically declare that, “We view sunlight as the best remedy, and hope this report helps illuminate these issues and marks the beginning of a change.”

I hope there’s something I’m missing about Anderson, and readers are (more than) welcome to tell me if I am. He said, in the report, that he’d spoken “with dozens of individuals, including former senior executives of the Adani Group” and that he reviewed “thousands of documents” and conducted his due diligence via “site visits in almost half a dozen countries.” So, he’s already been “out there,” if you will, which presumably means he feels safe and secure about things. Which is great.

And who knows, maybe he has some experience dealing with the kind of personal fallout that can result from interfering in the domestic affairs of a country run by an overbearing personality. Or maybe, if he doesn’t have any such experience, he’s hired someone (ideally several someones) who does, and those folks have accompanied him on his “site visits” and so on.

Even then, though, I’d suggest Anderson should be careful what he wishes for. If Hindenburg’s report does end up being the “sunlight” which “marks the beginning of a change,” it’ll almost surely mean undermining the political career of Modi, and altering the course of India forever. That may well be for the better, but Anderson might nevertheless live to regret it. This is going to follow him forever. Figuratively for sure. But maybe literally too.