10 reasons why the crisis facing Gautam Adani, Asia's second richest man, may not be over yet

Politically speaking, Gautam Adani is often perceived as having close ties to Indian Prime Minister Narendra Modi, with critics often suggesting Adani's rapid business growth is linked intimately with Modi's tenure of power.  

The story has also had ramifications on other firms, like GQG Partners (ASX: GQG). Shares in the Australian-listed fund manager experienced a 19% selloff on Thursday, 21 November. While Mr. Adani was cleared of the charges, GQG’s stock has only recovered about half of its losses. On the same day, GQG attempted to reassure investors with a statement, emphasising:

“We note that, consistent with our portfolio construction guidelines, GQG portfolios are diversified, with over 90% of our clients' assets invested in issuers unrelated to the Adani Group.”

Despite this, Adani is one of GQG Partners' highest conviction stock picks and is considered one of CIO Rajiv Jain's biggest and most contrarian gambles of recent times.

But the charges have been lifted. So the story's over, right?

Not so fast. Dr Allen has found a slew of other red flags that still exist within the Adani Group despite the bribery charges being lifted. The following are all notes that Allen provided to us. Where it has been included, sources are hyperlinked to each main red flag. 

Note: The Plato Global Alpha Fund (ASX: PGA1) holds neither long nor short positions on the Adani companies as it does not invest in emerging markets.

1) Auditors reporting three key concerns: 

• Contingencies related to taxation and litigations: The company faces ongoing litigations and claims involving direct and indirect taxes, as well as other legal proceedings. Assessing provisions or contingent liabilities in these cases requires significant judgment due to the complexity and uncertainty involved.

• Revenue recognition and adjustments for coal quality variances: The auditors emphasised the importance of accurately recognising revenue and making necessary adjustments for coal quality variances, which involve critical estimates. Inappropriate assessments could lead to misstatements in revenue.

• Measurement of coal inventory quantities: Given the substantial value of coal inventory, accurately measuring its quantity is crucial. The auditors pointed out that this measurement involves significant judgment and estimation, especially when assessing inventory at ports or yards.

2) Even the auditor itself is obscure: In May 2023, Shah Dhandharia & Co. LLP, a small Ahmedabad-based chartered accountancy firm, resigned as the independent auditor for Adani Enterprises and Adani Total Gas Ltd. This resignation followed concerns about the firm's capacity to audit such large conglomerates, as highlighted in the Hindenburg Research report.

3) Other Indian regulators have investigated Adani before: In October 2023, the NFRA [National Financial Reporting Authority in India] initiated an investigation into the audit firms associated with Adani Group's listed companies. This probe aims to assess the auditors' compliance with regulatory standards and their role in certifying the group's financial statements.

4) Deloitte, a far more well-known auditor, has also resigned in relatively recent times: In August 2023, Deloitte resigned as the auditor of Adani Ports & Special Economic Zone (APSEZ), citing concerns over transactions flagged in the Hindenburg report. Deloitte's inability to obtain sufficient information to address these concerns led to its departure.

5) Audit expenses are just 0.01% of the group's total revenues - which is objectively tiny.

6) Adani Group has seen a large increase in intangibles - "While not suggesting manipulation has occurred, there are examples of this elsewhere where it has been a sign of earnings manipulation e.g. capitalising costs, overstating asset valuations, and goodwill inflation," Allen said.

7) There is no independent chairperson - Gautam Adani is the chairman.

8) Related party transactions - Adani Group has been known to buy and sell goods from its subsidiaries and affiliated entities. The Securities and Exchange Board of India (SEBI) has already called the company out on this.

9) The alleged bribery case is, in itself, a high-impact governance event which is a red flag under Dr Allen's system.

10) Very high environmental intensity: The company has a very large environmental impact, relative to its revenues.