Industry Updates

India ETFs rattled by short seller accusations

Claims lodged against Adani conglomerate weigh

Sumit Roy

a large white building with domes and towers with Taj Mahal in the background

India ETFs are off to a poor start to this year as a scathing report against one of the country’s largest conglomerates spooked investors.

Europe's largest India ETF, the $1.4bn iShares MSCI India UCITS ETF (NDIA), is down 2.8% this year, lagging the 8.2% gain for the iShares Core MSCI EM IMI UCITS ETF (EIMI) over the same period.

Over the past three years, NDIA has handily outperformed EIMI – rising 29% versus 7.4% returns for the broader emerging market fund. The gap began to narrow after New York-based short-seller Hindenburg Research released a report accusing the Adani Group of one of the biggest corporate frauds in history.


The report, which was released on 24 January, sparked a nearly $70bn wipeout in market value for the Adani Group’s nine publicly listed stocks.

Hindenburg said it found evidence of “brazen accounting fraud, stock manipulation and money laundering at Adani, taking place over the course of decades”.

Hindenburg, which was founded in 2017 and is run by a 10-person team headed by Nate Anderson, specialises in “forensic financial research”. The firm looks for accounting irregularities, bad actors and illegal business reporting practices – and then seeks to profit from falling stock prices once they release the information publicly.

Meanwhile, the Adani Group is led by Gautam Adani, India’s richest man, with a net worth of $84bn, and he is also reportedly close to India’s prime minister Narendra Modi.

Adani’s business empire ranges from mining to power generation to port management to natural gas. On the date Hindenburg released its research report, Adani’s businesses collectively had a market value of $218bn.

But according to the short seller, much of that value is hot air.

Hindenburg’s research painstakingly details how the Adani Group uses a web of offshore shell companies to skirt regulations, manipulate stock prices and inflate profits.

The accusations have rippled to rattle not only Adani Group stocks but India equities in general.

The aforementioned INDA currently holds six Adani stocks, with a combined weighting of nearly 4% in the portfolio.

Even under a worst-case scenario where Adani Group collapses, that type of weight would not cripple the ETF. The bigger issue is how the questions Hindenburg has raised about the Adani Group have undermined confidence in India stocks.

Are these issues that extend beyond the conglomerate? Will investors start to question the premium valuation that India’s stock market currently commands?

Today the MSCI India index trades at 20x forward earnings versus only 12x for the broader MSCI Emerging Market index.

That premium valuation is the result of investors’ enthusiasm about India’s strong growth prospects. This year, India is expected to surpass China as the world’s most populous country.

The country’s massive, youthful workforce, combined with Prime Minister Narendra Modi’s business-friendly policies, turned India into the darling of the emerging market universe.

But Hindenburg’s report is testing investors’ resolve.

On Tuesday, the flagship Adani Enterprises was able to raise $2.5bn through a share sale, but not as smoothly as it would have liked.

The shares were largely purchased by existing Adani investors who have every incentive to protect their existing stakes (the assumption being that some of those investors could be involved in the alleged fraud and market manipulation).

Indeed, the fact that people were even questioning whether the Adani Group would be able to raise an amount of money equal to 1% of its pre-Hindenburg valuation is indicative of how quickly the mood around the conglomerate has changed.

Only time will tell how this all shakes out, and if India ETFs will remain a favourite of emerging market investors.

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