Fairfax Rejects Allegations Of Falsely Showing Its Indian Portfolio Digit As Profitable In 2021

Fairfax Holdings has refuted the allegations made by short seller Muddy Waters against its Indian portfolio company Digit Insurance of falsely showing it to be profitable in the annual report in 2021.

Prem Watsa, the Indian-Canadian founder of Fairfax, along with the company’s management team, responded to inquiries during an investor conference call on Friday (February 17), vehemently refuting all of Muddy Waters’ allegations. The call was held to address concerns about alleged asset value manipulation levelled against the company.

“Fairfax’s reporting framework is IFRS, not US GAAP. We have been following IFRS since 2010,” the company’s chief financial officer Jennifer Allen clarified, adding that Digit was profitable under IFRS in 2021.

Under Indian accounting standards, the company’s accounts for its operations in India reflected a loss in the year 2021.

In a recent study, the forensic-activist investing firm Muddy Waters alleged that Fairfax Financial Holdings “hatched a plan” to take extremely aggressive fair value gains on its ownership in unlisted insurer Go Digit General Insurance during 2021.

“In Q42020 – Q12021, rather than buying back shares, Fairfax put in place Total Return Swaps (TRSes) on its stock. On the surface, TRSes seem like a risky way of returning capital to investors, because if the stock declined, Fairfax would take both P&L and Book Value hits. Plus, it has no anti-dilutive feature such as would be guaranteed to increase shareholder value permanently,” said Muddy Waters.

Watsa said that Muddy Waters deliberately targeted investments where the market value was lower than the value recorded in Fairfax’s books, while overlooking numerous other investments where the latter had marked them in its books at values below their market worth.

“One-sided arguments have been made by not mentioning one company where the carrying value is below market value”, he said.

Founded in 2017 by Kamesh Goyal, Go Digit offers insurance policies across verticals including motor vehicle, health, travel, and property. Besides Prem Watsa’s Fairfax, the startup is also backed by prominent names such as Sequoia, cricketer Virat Kohli, and actor Anushka Sharma.

Go Digit competes against the likes of Acko, ICICI Lombard, Bajaj Allianz, Tata AIG, and more.

Last year, Go Digit General refiled draft red herring prospectus (DRHP) with the Securities and Exchange Board of India (SEBI) for its $440 Mn initial public offering (IPO) to address the concerns raised by the markets regulator about its employee stock appreciation plans.

SEBI put Go Digit’s proposed IPO in ‘abeyance’ in September 2022. SEBI said that the startup was ‘not eligible’ for an IPO over concerns around the issuance of stock appreciation rights to its employees.