By Sriram M, Chris Thomas and Jayshree P Upadhyay

MUMBAI (Reuters) - Gautam Adani's $2.5 billion share sale was fully subscribed on Tuesday as investors pumped funds into his flagship Adani Enterprises despite a scathing short-seller's report which pummelled stocks in the Indian billionaire's group.

The share sale is critical for Adani, not just because it will help cut debt, but because its success will be seen as a mark of investor confidence as he faces one of his biggest business and reputational challenges of recent times.

The book building process of India's largest secondary share sale had received only 3% in bids on Monday, amid it could struggle due to a market rout in Adani's stocks in recent days. The 30% anchor portion of the issue had been subscribed fully last week.

But on Tuesday, the overall share sale was fully subsribed as foreign institutional investors and corporates pumped in funds, while participation by retail investors and Adani Enterprises employees remained low.

The offer closes days after Adani's public face-off with Hindenburg Research, which last week flagged concerns about the use of tax havens and "substantial debt" at the group. It added that shares in seven Adani listed companies have an 85% downside due to what it called "sky-high valuations".

That has since sparked $65 billion in cumulative losses for stocks of the Adani group, which called the report baseless.

The support for Adani's share sale came even as the flagship's shares were trading at 2,967 rupees, up nearly 2.5% but below the lower end of the sale price band of 3,112 rupees.

Adani Group's total gross debt in the financial year ended March 31, 2022, rose 40% to 2.2 trillion rupees ($26.83 billion). Adani said on Sunday - while responding to Hindenburg's allegations - that over the past decade the group has “consistently de-levered”.

Hindenburg later said Adani's "response largely confirmed our findings and ignored our key questions."

GRAPHIC: Adani Group's ballooning debt (https://www.reuters.com/graphics/ADANI-INDIA/lbpggbnompq/chart.png)

Adani had in recent days repeatedly said investors were standing by its side and the share offering would go through, amid rising concerns that may not happen. Bankers at one point had considered tweaking the pricing of the issue, or extending the sale, Reuters had reported.

Adani even said the Hindenburg report was a "calculated attack" on India and its institutions while its CFO compared the market rout of its stocks to a colonial-era massacre.

Demand from retail investors garnered bids only worth around 10% of the shares on offer for that segment. Demand mostly came from foreign institutional investors, as well as corporates who bid in excess of 1 million rupees each, data showed.

Over the weekend and through Monday, Adani's firm held extensive discussions with investment bankers and institutional investors to attract subscriptions, according to two sources with direct knowledge of the talks.

Abu Dhabi conglomerate International Holding Company said it will invest $400 million in the issue.

The Hindenburg report and its fallout have drawn global attention. Adani is now the world's eighth richest person, down from third ranking on Forbes' rich list last week.

Adani Transmission rose 1.6% on Tuesday, after losing 38% since the Hindenburg report, while Adani Ports and Special Economic Zone climbed 3.2%. Adani Total Gas languished at its 10% lower price limit, while Adani Power and Adani Wilmar were down 5% each.

GRAPHIC: Adani firms' market cap erosion since Hindenburg report (https://www.reuters.com/graphics/EROSION-JAN31/JAN31-EROSION/dwvkderebpm/chart.png)

Global index publisher Russell said on Tuesday it continues to monitor publicly available information on the group, in particular from the Indian regulatory authorities.

Hindenburg said in its report it had shorted U.S.-bonds and non-India traded derivatives of the Adani Group. On Tuesday, U.S. dollar-denominated bonds issued by Adani Ports and Special Economic Zone continued their fall into a second week.