Editorial Analysis – Lessons from Hindenburg’s ‘skin in the game’ approach

Source – TH

• Prelims: Protectionism, liberalization, Neoliberalism, capitalism, GDP etc
• Mains GS Paper III and IV: Government planning, mobilization of resources, LPG reforms, protectionism etc

Key Points

Hindenburg released an extensive research report that made serious accusations about Adani Group’s ethical business practices, including the manipulation of stock prices to artificially increase their value.

About the Issue

Crony capitalism

The term refers to a capitalist economy where individuals or businesses having strong connections with political leaders and government officials leverage their political affiliations to gain an unjust advantage in the market.

Crony Capitalism Index 2021 published by The Economist

India secured the seventh rank in the list of countries where crony capitalist sector’s wealth represented 8% of the Gross Domestic Product (GDP).

Issues related to crony capitalism can include

• Unjust Advantage in Market
• Market Competition Distortion
• Innovation Reduction
• Public Mistrust in Government and Economy

The Hindenburg Group and Its Report

• The company specializes in conducting forensic financial research.
• Its focus areas include identifying:
  • Accounting discrepancies
  • Undisclosed transactions with related parties
  • Unethical or illegal business/financial reporting practices
  • Unreported financial, regulatory, or product-related issues within companies.
• The company released a report criticizing the group’s financial state.
• According to the research firm, which holds short positions in Adani companies through US-traded bonds and non-Indian-traded derivative instruments:
  • Key listed companies in the group had “substantial debt” which has put the entire group on a “precarious financial footing”.

Impact

• A significant portion of that wealth vanished after the stock prices plummeted, causing a market capitalization loss of over $100 billion across seven publicly traded Adani Group companies.
• Cancellation of a $2.5 billion share offering after launch and, potentially, a series of loan applications being declined.

Issues

• The Solicitor General of India raised doubts about Hindenburg’s intentions in the Supreme Court.
  • He contended that the report was based on an erroneous assumption and aimed to artificially lower the stock price to make a profit.
• Several prominent figures, including a former Vice Chair of NITI Aayog, a former Chief Economic Adviser, and a former Foreign Secretary, have joined in questioning Hindenburg’s motives.
• They have labeled the report as a malicious attempt to manipulate Adani’s shares for personal gain.

Empirical evidence to suggest that Hindenburg’s decision to take a financial bet or have a ‘skin in the game’ helped to establish the group’s credibility among market participants

• In August 2022, CreditSights released a comparable report that scrutinized Adani Group’s governance practices and share valuations.
• Unlike their response to the Hindenburg report, the group did not evoke nationalism by mentioning “Jalianwalla Bagh” or the national flag in their reply to these accusations.
• The CreditSights report went mostly unnoticed, and the stock market showed no reaction, resulting in no impact on the Adani companies’ share prices.
• In the last four years, foreign publications such as Bloomberg, The Guardian, and Morgan Stanley have released eight news or research reports that raised concerns about Adani Group’s questionable business practices and share price movements.
  • However, none of these reports appeared to have had the same impact as the Hindenburg report.
• Hindenburg’s willingness to take a financial position lent more credibility to its findings than just releasing a report.

An indication of truthfulness or accuracy

• The financial market, much like the political market, is intricate and multifaceted, making it challenging to manipulate easily.
• In financial markets, it is customary for investors who purchase shares to promote them with the goal of persuading others to buy the same shares, resulting in a price increase.
  • This is considered an acceptable practice, and no one objects to it.

Distinction between unlawful and unethical actions

• According to Adani’s supporters, Hindenburg unfairly deflated the company’s stock price to benefit themselves.
• Profiting from a decline in a stock’s price is no less ethical than profiting from its rise.
• The concept of “skin in the game,” where there are balanced rewards and consequences, is essential in fostering trust and integrity within society.
• Hindenburg’s decision to bet against Adani’s stock price through a short sale demonstrated confidence in its research and played a critical role in uncovering the company’s alleged financial misconduct.
  • This action was both legal and ethical.

Way Forward

• Speculations of government support may have incentivized foreign bond and equity investors to invest in Adani for higher returns.
• Adopting a ‘skin in the game’ mindset, where journalists, scientists, and commentators are responsible for their actions, can mitigate fake news and unwarranted attacks.
  • This can promote societal trust and minimize conflicts.
• Neoliberalism isn’t just about promoting market competition and transparency but is also used to manipulate income and wealth redistribution, as seen in this case where it benefits a single individual and their company.

Mains PYQ

The broader aims and objectives of WTO are to manage and promote international trade in the era of globalization. But the Doha round of negotiations seem doomed due to differences between the developed and the developing countries.” Discuss in the Indian perspective.(UPSC 2016) (200 WORDS, 10 MARKS)

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