The Adani Saga: How the Mighty Have Fallen

The Hindenburg report on Adani Enterprises and its stock market rout have confirmed many fears and raised more questions

Getty Images
Getty Images

Aakar Patel

In 2016, The Economist magazine published a ‘Crony Capitalism Index’, which measures billionaire wealth from crony sectors as a percentage of GDP. India’s rank was ninth worst in the world and our billionaires had about 3 per cent of India’s GDP. In 2021, India’s was seventh worst and billionaires now had gone up three times to about 9 per cent.

The crony sector refers to extractives (mining, coal, oil) and infrastructure, where the government can determine who gets what contract.

Readers should bear this in mind while looking at the fall in share prices of Adani group companies, an event that overshadowed the Union budget. The world’s second richest man lost his high perch and about half his wealth in a matter of days. His flagship firm Adani Enterprises opened a share sale for Rs 20,000 crore last Friday, then struggled with the sale on Monday, managed to sell the shares in unusual fashion (with almost no participation from retail investors) on Tuesday and then withdrew the sale entirely on Wednesday (1st Feb).

Stock prices of the group have been in free fall, almost daily hitting the lower circuit. All this happened because Indian investors and foreign banks were reacting to the findings from Hindenburg, an American investment firm which released an extremely detailed and damning report on the group’s practices. Hindenburg has taken a short position on Adani, meaning that it stands to make money if the valuation and credit worthiness of the group falls after it published the report. Therefore it has, as Adani points out, a vested interest in bringing down the price. This is true. On the other hand, Hindenburg also has a genuine stake in what it has done and is putting its money where its mouth is.

Now for some reason, Indian mutual funds have avoided investing in Adani for the most part. However the state-owned Life Insurance Corporation of India has an exposure of tens of thousands of crore of citizens’ money in Adani. Much of it is profit that has come as the stock began to appreciate in the last few years, but most of it is not. It is important, therefore, for Indians to know what the allegations against Adani are and I am setting down here what the big issues are. The primary one is that foreign (‘offshore’) companies, which are in fact disguised group companies, hold most of the non-promoter shares of Adani firms. If this is proven, The Hindenburg report on Adani Enterprises and its stock market rout have confirmed many fears and raised more questions market regulator Sebi (Securities and Exchange Board of India) will have to delist these companies. If promoters hold most of the shares in their company, they can manipulate the price by tightly regulating supply. Can we see evidence of this happening?

A Bloomberg piece last year reported that the Adani group’s combined value was $255 billion ‘even when the combined annual net income of its seven publicly traded firms is less than $2 billion’ and that ‘shares of Adani Green Energy Ltd. have jumped 4,500 per cent over the past three years’. The wealth of Adani, who till recently was the world’s second richest individual, is from the valuation of these companies and not from the profit they make.

Adani Enterprises had revenue of Rs 15,500 crore in 2019, Rs 16,200 crore in 2020, Rs 13,358 crore in 2021 and then Rs 26,800 crore in 2022. Net profit in 2020 was Rs 698 crore, falling to 368 crore in 2021 and returning to Rs 720 crore in 2022. As a column in the Business Standard points out, these ‘are not the financials that one would expect from companies valued at 300 and even 600 times earnings—stratospheric multiples that one might understand for small start-ups with exponential growth potential, not for companies in capital-intensive infrastructure businesses’.

The companies abroad Hindenburg refers to appear to be set up purely to hold Adani group shares. For example, the report talks of ‘Elara, an offshore fund with almost $3 billion in concentrated holdings of Adani shares, including a fund that is 99 per cent concentrated in shares of Adani’.

Parliament has been told that neither the funds nor Adani firms were being investigated by the Enforcement Directorate (ED), which is the agency that looks at money laundering. The government said in 2021 that Sebi was looking at some “compliance” issues at Adani and that the Directorate of Revenue Intelligence was “investigating certain entities” of the Adani group. However, nothing has come of this so far. Even when Bloomberg News reported it couldn’t find contact details for Markus Beat Dangel, Anna Luzia Von Senger Burger and Alastair Guggenbuchi-Even and Yonca Even Guggenbuehl, the names the government gave in Parliament as persons responsible for the funds, there was no response. Contrast this to the speed with which the government raids and freezes accounts and arrests its opponents and dissenters, using the Enforcement Directorate.

Some of the other things that Hindenburg has found are quite concerning from the corporate governance point of view. For instance Adani Enterprises has an independent auditor called Shah Dhandharia, which had four partners and only 11 employees, Hindenburg said. The same firm also audits Adani Total Gas.

Another thing to know is that these accusations have been made before, by reputable news agencies, but this has not resulted in government action. The Financial Times, in November 2020, ran a report headlined ‘Modi’s Rockefeller: Gautam Adani and the concentration of power in India’. It said rules were bent to allow Adani, who had no experience in the sector, to take all six airports being privatised in 2018. ‘Overnight Mr Adani became one of the country’s biggest private airport operators. He is also its largest private ports operator and thermal coal power producer. He commands a growing share of India’s power transmission and gas distribution markets’.

So far, the government has been silent on the charges being levelled, even after the stock price rout. Perhaps it is hoping for the share price to settle so that the matter blows over. That might happen, and we should not be surprised if nothing more comes of this, given that nothing has come of it in the past either. However, it seems unlikely, given the scale of the panic and the stakes involved. Crucial questions have been raised about this government, the nature of the economic plan it has centred around ‘national champions’ like Adani, on crony capitalism and the rule of law. They have not been fully answered and will not go away. The ED and the CBI (Central Bureau of Investigation), which are sent with such alacrity and so frequently after Opposition parties, civil society organisations and individuals, are nowhere in sight even when cries of scandal have gone global.

After Adani hinted at filing a case against Hindenburg, the company invited the lawsuit, asking Adani to file it in America, where it would ask for documents to be produced. One hopes that this case is filed so that things become clear.

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