Mumbai, India – Amidst the usual traffic jams on one of the busiest flyovers in central Mumbai, drivers could hardly fail to notice a simple but large hand-painted slogan proclaiming the rapidly growing fortunes of businessmen Gautam Adani and Mukesh Ambani as a miracle of the Narendra Modi government.
However, in the city’s stock market, Adani’s fortunes, which had increased by more than $100 billion in less than a decade, were eroding faster than the paint on the slogan could dry. Adani’s self-styled conglomerate grew by managing a rapidly growing share of India’s public infrastructure including ports, airports, power plants and coal mines.
However, a recent report by New York-based activist short-seller Hindenburg Research revealed a wide array of offshore entities linked to the Adani group, which it indicated may have been used to inflate profits, hide losses or obscure ownership. The report, titled Adani Group: How the world’s third-richest man pulls off the biggest fraud in corporate history, said the group was involved in “brazen stock manipulation and accounting fraud”.
The report, which came out on January 24, hit India and the shares of the group’s listed companies like a bombshell, even as they returned to several older leads of regulatory inquiries that went nowhere. The days that followed wiped more than $110 billion off the market value of the group’s listed companies and halved Adani’s net worth.
Hindenburg’s report came just as the 200 billion rupee ($2.5 billion) public offering for Adani Group’s flagship Adani Enterprises was set to open on the Bombay Stock Exchange. The group hit back at the report on the opening day of the public offer, January 27, saying it was an “attack on India”. He published a 432-page response and fought to subscribe to the public offering.
But share prices for group companies continued to fall and Adani Enterprises said it would withdraw from the offer, even though it was fully subscribed and money returned to investors.
The damage from the report extended far beyond the Adani group. His claims about regulatory shortcomings and questionable corporate governance were ill-timed for India as it strives for global center stage. It recently overtook the United Kingdom as the world’s fifth largest economy and China as the world’s most populous country. This year he chairs the G20.
“Investors are concerned about the risk of contagion,” said Charlie Robertson, chief economist at Renaissance Capital, an emerging markets investment bank. “If there is one company like this, can we find more?
In China, for example, investors continued to invest in real estate companies after Evergrande, but several other companies later turned out to be problematic as well,” he said, referring to a giant Chinese real estate company that nearly collapsed under massive debt in the past few years. years, with risk spillover to several other real estate companies.
While the scale of the Adani-owned conglomerate, whose meteoric rise to become the world’s third-richest person, is comparable to few other companies, the episode left Indian regulators with a lot to answer for.
“This calls into question the credibility of Indian regulators, just as Wirecard was for German regulators,” says Tim Buckley, director of Australian think tank Climate Energy Finance, who has followed various Adani group deals for years. Germany’s financial watchdog has been heavily criticized for ignoring early warnings about Wirecard, the digital payments company that was once a stock market darling but exploded in an accounting scandal in 2020.
Adani’s rise
60-year-old Gautam Adani is known for his personal modesty as much as for his flamboyant ambition and success. After a brief stint as a trader in the Mumbai diamond market, still in his twenties, he returned to his home state of Gujarat and began trying his hand at business.
In 2002, months after now-Prime Minister Narendra Modi became the chief minister of Gujarat, religious unrest erupted in the state, with questions about Modi’s role and that of the police in the unrest. Shortly thereafter, Modi began organizing major global investor conferences, seeking to burnish his country’s image—and his own—with an investor-friendly sheen.
With Adani managing the country’s largest port and several other infrastructure projects, the chief minister became known for getting things done.
But even as his fortunes grew, Adani had a few personal shaves. He was staying at the Taj Mahal Palace Hotel in Mumbai when gunmen attacked it in 2008. Adani narrowly escaped as the attackers battled Indian police for days, killing residents and staff before being killed themselves.
Years earlier, Adani was also briefly kidnapped for ransom before escaping – events that may have encouraged him not to stand out. He recently admitted that he spends most evenings at his home in Ahmedabad, playing cards with his wife, a trained dentist who now runs the group’s charity work.
Adani is one of seven siblings, several of whom work in the group, as do both his sons, Karan and Jeet. Karan is the CEO of Adani Ports and SEZ and was recently appointed to the Maharashtra State Economic Advisory Board.
When Modi became Prime Minister in 2014, he arrived in New Delhi on an Adani aircraft. Since then, Adani has successfully expanded into airports, renewable energy, data centers, defense manufacturing and real estate among other sectors. Many contracts for such infrastructure projects were obtained through a competitive bidding process.
“India doesn’t seem interested in developing a range of regional infrastructure players,” says Rohit Chandra, assistant professor of public policy at IIT Delhi. “This pursuit of national champions comes at the cost of growing regional contractors and climbing the project complexity ladder.”
Crisis
Since 2020, until the Hindenburg report, some Adani Group shares have risen more than 400 times their price per share. He suggested either that shareholders were expecting a sharp increase in earnings or that the stock was trading at too high a price. Then questions about the group’s ownership began to swirl.
While the Adani family held stakes up to as high a threshold as regulators would allow, the report found that offshore funds – including Mauritius, Cyprus and the UK – also held substantial stakes in the group’s companies. Elara, Vespera, Cresta, New Leaina, LTS, APMS, Albula, Asia Investment Corporation and Opal among other such funds had few, if any, other investments.
Hindenburg’s analysis showed that much of the assets of these companies were deployed in Adani shares, suggesting they could be shell companies. The report traced the links between Gautam Adani’s UAE-based brother, Vinod Adani and several others.
“When you see such a complex network of offshore companies from a company whose operations are mostly in India, the onus is on the company to say why they exist,” Climate Energy Finance’s Buckley said.
The Hindenburg report said these funds accounted for up to 47 percent of Adani Group’s share volume on some days and were likely used to prop up share prices.
“Many of the entities associated with Vinod Adani have no obvious signs of business, including registered employees, independent addresses or phone numbers and a significant online presence,” the report said. “Nevertheless, they have collectively moved billions of dollars into India’s Adani publicly listed and private entities, often without the required disclosure.”
The Adani group said in its press release that Vinod was not a related person as he did not hold official positions in the group. A spokesman for the group did not respond to an emailed request for comment.
Adani Enterprises’ recent IPO prospectus said the state’s stock market regulator, the Securities and Exchange Board of India, had asked the listed group companies for ownership and director details in November 2020 and that the companies had provided those details.
And in parliament, the government said that such an investigation is underway, but the findings, if any, have not been made public.
Fallout for Adani Group
Adani Enterprises’ share price fell from 3,442 rupees ($41.5) on January 24, when the Hindenburg report was released, to 1,562 rupees ($18.8) within days before recovering to 1,983 rupees (23, $9) on Feb. 8 as the company sought to reassure investor confidence by prepaying more than $1.1 billion in bonds. He also announced that some of his pledged shares had been released.
But by then the banks Credit Suisse, Citigroup and Standard Chartered stopped accepting Adani bonds as collateral, and rating agency S&P downgraded Adani Ports and Adani Electricity to negative.
The downgrade was due to “management risks and funding challenges for the larger Adani group,” the report said. S&P also removed Adani Enterprises from its Dow Jones Sustainability Indices, leading to challenges in obtaining green financing, key to the planned transition from coal to renewable energy.
The company has faced sustained campaigns by environmental activists against its coal mining projects in India and Australia. They now cite the Hindenburg report to say the related-party transactions show the walls between its renewables and coal businesses may not be strong enough.
In 2021, the Adani group transferred ownership of the Bowen Rail Company, the coal transport component of the Adani Carmichael thermal coal project, from Adani Ports to Adani Enterprises “to meet carbon neutral commitments”, said Will Van De Pol, a market activist Forces, an Australian group that lobbies banks to make green investments.
“The asset transfers are being used to mask links to the company’s coal expansion plans, underscoring the need for investors to steer clear of the entire Adani group.”
Fallout for regulators
The Adani crisis and its impact on regulatory agencies and the government is being debated in the Indian Parliament. Opposition parties called for a parliamentary investigation of the group. Investors also say that confidence needs to be restored.
“We would like to see a credible investigation by the Indian authorities. This is the best way to address the concerns of Indian and international investors,” says Renaissance Capital’s Charlie Robertson.
So far, the government has not announced new investigations into Adani Group shares and holdings. In a speech to parliament on Wednesday, Modi said “the 2030s will be India’s decade” but barely addressed the crash in Adani shares.
“The regulator needs to do its homework and then take action, not just react based on social media,” said JN Gupta, director of Stakeholder Empowerment Services, a corporate governance consultancy.
The inquiry could also strengthen the government’s efforts, through its G20 presidency and beyond, to attract foreign direct investment and investment in its markets.
With China undergoing long lockdowns due to the COVID-19 virus pandemic and a trade war with the United States, India seemed an increasingly attractive destination. A day before the Hindenburg report was released, India’s Commerce Minister Piyush Goyal said Apple plans to increase its production in India, aiming to make up to 25 percent of its phones in the country, up from the current 5 percent.
But Renaissance Capital’s Robertson says: “Three months ago there was a lot of investment in India and China looked risky. Today that has changed.”
In India itself, one likely effect of the report could be to slow down a number of infrastructure projects for which the Adani group has contracts.
“Postponement, rejection and re-competition for projects are part of the infrastructure development process in most developing countries,” says IIT Delhi’s Chandra. “It is very likely that the Adani group will consolidate, change priorities and perhaps scale back some of its project ambitions following the losses of the past few weeks.”
It could be the postponement of the Indian dream itself.