Prem Watsa-backed Fairfax is under rough weather after short-seller hedge fund Muddy Waters Research alleged consistent manipulation of asset values and income by engaging in often value destructive transactions to produce accounting gains. Fairfax, which has invested heavily into India and is one of the contenders for buying a government stake in IDBI Bank, has denied these allegations.

“We believe a conservative adjustment to book value should be around $4.5 billion, or 18 per cent lower than reported,” the hedge fund said in a report.

Specifically for India, in 2018, Fairfax boosted its profit and book value with accounting gimmicks at Indian outsourcing provider Quess by $889 million. Even after impairments in 2019 and 2020, Fairfax’s carrying value for Quess overstates book value by $225 million, it said.

The report said that Fairfax had hatched a plan to take highly aggressive fair value gains throughout 2021 on its investment in Indian insurer Go Digit General Insurance Ltd. In Q4 2020–Q1 2021, rather than buying back shares, Fairfax put in place Total Return Swaps (TRSes) on its own 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. To us, these TRSes only make sense if you have an ace up your sleeve. Digit seems to have been that ace,” the report said.

“Fairfax has not mentioned Digit on an earnings call since Q3 2022. Further, our research indicates that Digit has little proprietary technology and is effectively a fairly conventional, albeit small, insurer in the Indian market. From S&P Capital IQ’s comp valuations, we see Digit as generously valued at around $1.5 billion presently. We therefore adjust Fairfax’s book value downward by -$1.1 billion to align Digit’s carrying value with a more reasonable value.”

Responding to the allegations, Fairfax said it disagrees with the allegations and insinuations contained in the report and would like to assure all shareholders that Fairfax has prepared its financial statements and reporting in accordance with all applicable accounting principles.