Gautam Adani has lost $70 billion in the past few weeks. The good news is that India, so far, is letting markets run their course.
Gautam Adani has lost $70 billion in the past few weeks. The good news is that India, so far, is letting markets run their course.
T he group of businesses owned by India’s richest man has been accused of “the largest con in corporate history” by a U.S. activist short-selling firm. The conglomerate denies the charges as “nothing but a lie.” What does it mean for the Indian economy, and the world?
The Adani Group
Gautam Adani had settled in behind Elon Musk and Jeff Bezos as the world’s third-richest man. His conglomerate, the Adani Group, contains subsidiaries in numerous sectors of the Indian economy, playing a leading role in seaports, airports, electricity, natural gas, and mining. Adani recently made headlines worldwide for buying the port of Haifa, Israel, as the group is seeking to expand more outside of India. The Adani Group had peaked in valuation at $235 billion, and Adani himself was worth $120 billion.
On January 24, activist short-selling firm Hindenburg Research published a massive report alleging widespread fraud by the Adani Group. The report says Adani was able to increase his net worth by $100 billion in only the last three years through stock manipulation. Adani Group companies are publicly traded but tightly controlled by the Adani family, with members in key leadership roles and owning 73 percent of outstanding shares. Such arrangements are not unusual in India, where powerful families often exert major political and economic influence.
Hindenburg alleges that structure has allowed the firm to get away with fraud. The report says that family members have created shell companies in tax havens that they have used to bid up the stock prices of Adani companies. That has allowed the market capitalization to balloon, which has then allowed the group to take on more debt, leading it to be over-leveraged, Hindenburg argues. The report also alleges that the group has not been honest in its financial reporting, exaggerating profits and understating liabilities. It has been able to get away with this, the report alleges, because Indian institutions are corrupt or incompetent, and the Adani group is well-connected with the current Indian government.
The Adani Group denies the report entirely. In a 413-page document from January 29, it says that Hindenburg made up its accusations in an attack not only on Adani, but “on India, the independence, integrity and quality of Indian institutions, and the growth story and ambition of India.” It accuses Hindenburg of securities fraud, alleges a conflict of interest, and says that many of the issues that Hindenburg raised are answerable with information that is already publicly available.
Regardless, Adani Group stocks have suffered as markets respond to the allegations. Adani himself is estimated to have lost as much as $70 billion so far as the stock prices tumble. After a brief rally, stock prices began to fall again when MSCI, an American financial firm, announced on February 9 that it would be reviewing the status of Adani Group shares in major mutual funds. MSCI wanted to know how many shares are truly free-floating, i.e., are not held by insiders or people who are generally unwilling to sell. After its review concluded, it announced it would be reducing the weighting of Adani Group companies in its mutual funds. The Norwegian sovereign wealth fund, one of the world’s largest institutional investors, announced it had divested itself entirely from the Adani Group earlier that same day.
In a detailed blog post, NYU finance professor Aswath Damodaran scoured the available evidence. He concludes that Hindenburg may be onto something for some of its claims, but that others aren’t very strong.
He finds the claims of exaggerated profits to not be very credible. “If Adani is manipulating earnings, it is not doing a very good job, reporting low margins and return,” he wrote. He also is skeptical of the claim that the firms are over-leveraged. It isn’t unusual for infrastructure companies, which are the bulk of Adani’s business, to have lots of debt, since their investments are expected to pay off decades in the future, he wrote.
Where Hindenburg has a point, to Damodaran, is with the allegations around using shell companies to manipulate stock prices. These companies are based in Mauritius, an island country in the Indian Ocean often considered a tax haven, and they do little else besides invest in Adani Group firms, he writes. Hindenburg says that Vinod Adani, Gautam’s brother, has created 38 such shell companies on his own.
Damodaran believes that Adani stocks were significantly overvalued, and that they still aren’t a bargain even after their declines. Basant Maheshwari, an Indian investor, disagrees and thinks it could be time to buy. But the Adani Group has sustained significant damage in the markets regardless.
Unlike, say, FTX, the Adani Group owns many real assets and provides many real products and services to real customers. In addition to its newly acquired port in Haifa, Adani operates some of India’s largest ports and smaller ones in Sri Lanka and Australia. Its electric-transmission subsidiary operates thousands of miles of Indian electricity infrastructure, and its electricity-generation subsidiary powers millions of Indian homes. The claim that its actions are solely a “con,” let alone the “largest con in corporate history,” is likely hyperbolic. But that doesn’t mean there isn’t some fraud going on, especially given Adani’s place in Indian society.
Adani and Indian Politics
Adani is not merely a wealthy businessman. He is also very close to the current government of Prime Minister Narendra Modi and the Bharatiya Janata Party (BJP). Adani is from Gujarat, the same state that Modi is from and led as chief minister before becoming prime minister. A particularly evocative illustration of their connection is the fact that Modi flew to New Delhi on an Adani-owned plane after he was first elected prime minister.
Cronyism is hardly uncommon in India, and Adani’s close relationship with Modi has come under scrutiny. Adani Group energy concerns are necessary components for Modi’s green-energy pledges. Adani purchased NDTV, a major Indian news network, in a move that was criticized by Indian journalists who believe it hurts media independence. In the wake of Modi’s more recent efforts to prohibit Indians from watching a BBC documentary critical of him, concerns about media independence are worth taking seriously.
The BJP’s political opponents have certainly latched on to the controversy. Members of the parliamentary opposition heckled finance minister Nirmala Sitharaman during her budget address on February 1, shouting “Adani, Adani.” The budget address is normally the biggest event of the year on the Indian political calendar because it’s when the government announces its legislative priorities, but this year the Adani issue overshadowed it.
Rahul Gandhi, leader of the Indian National Congress (INC), the largest opposition party, questioned how Adani became so rich so quickly in a speech in Parliament on February 7. “When the PM comes to Delhi and the real magic begins in 2014. In 2014, [Adani] was in the 609th spot on the list of richest people and climbed to the second spot,” Gandhi said. INC general secretary Jairam Ramesh speculated on whether there was pressure on Indian regulatory authorities to go easy on Adani.
In a 90-minute speech in Parliament on February 8, Modi went on offense, saying, “The more dirt you fling, the more the lotus shall bloom” (the lotus is the symbol of the BJP). But, notably, he never mentioned Adani by name. An unnamed BJP leader told the Times of India on February 6, “Everything will be fine, give us a week.”
More than speeches, opposition MP Keshava Rao demanded a joint parliamentary committee to investigate the issue. The Supreme Court of India agreed to hear public-interest litigation on it. Unlike in the U.S., the Supreme Court of India is allowed to hear cases where parties don’t have to demonstrate standing, so long as they are acting in the public interest. “It is ultimately the public money for which the respondents [the government] are answerable and there needs to be strict concern for mitigating of such loans,” the petitioners said.
That’s because two of the largest institutional investors in India are the Life Insurance Corporation (LIC) and the State Bank of India (SBI), which are both state-owned. There was some concern that if the Adani Group suffers too much, larger systemic problems in the Indian economy could arise which could impact government finance.
But this is the good news: So far, it appears that systemic risks are low. Sitharaman, the finance minister, said that the LIC and the SBI are not overexposed to Adani debt, and the government has observed all proper limits in its investments. Reserve Bank of India governor Shaktikanta Das, who is an independent civil servant and not part of the government, said, “The strength, size and resilience of the Indian banking system now are much stronger and larger to be affected by a case like this.” Both the LIC and the SBI are less than 1 percent invested in Adani Group firms, and as the Economist noted, hardly any Indian mutual funds hold significant stakes.
The Future of Indian Capitalism
If the government doesn’t step in to try to save Adani, and if systemic risk doesn’t arise, this episode could wind up being a step forward for the Indian economy. As S. A. Aiyar wrote for the Times of India on February 8, “Globalisation has little-appreciated virtues such as improving corporate governance by detailed scrutiny of the mightiest titans.” In the more insulated Indian economy of the past, men such as Adani would have been able to get away with just about anything. Aiyar notes that we don’t yet know the full truth of Adani’s actions, but “such scrutiny is good regardless of the outcome.”
Before India’s 1991 economic liberalization, foreign investment in domestic stock markets was prohibited. “The Bombay Stock Exchange (BSE) was a snake pit rife with dubious practices and manipulation,” Aiyar wrote. After markets were opened, “foreign investors prodded the authorities into stock market reforms to make foreign investment in India safer and more profitable.” That’s one of the necessary ingredients for India’s future economic growth.
Shekhar Gupta, writing for the Print, made the case that the Adani affair is “the toughest stress test for Indian capitalism in our independent history.” He wrote, “When foreigners invest in our companies, when our companies list overseas, when the world sings our praises, when FDI and FPI figures zoom in, we celebrate. Do we, at the same time, have the nerve to take the downsides that come with it?”
“If India’s most powerful political establishment in almost five decades responds to a situation like this as if it’s something that must only play out between a corporate and the market, it is the coming of age of Indian capitalism,” Gupta wrote. The coming of age of Indian capitalism isn’t just good for India. It’s good for the world.
This year, India will surpass China as the world’s most populous country. Unlike China, it is a democracy — with serious challenges, but nonetheless a democracy — with a fledgling market economy. Hundreds of millions of people will see real, meaningful improvements in their standard of living if India’s economy sees the prosperity free markets can bring, and the rest of the developing world will have a big role model to look up to that isn’t China. And a booming India becomes a more valuable member of the Quad alliance (with the U.S., Japan, and Australia) in opposition to China.
India’s government is unfortunately far from realizing that dream. Sitharaman’s budget this year didn’t do much to worsen things economically, but it didn’t do much to improve them either. Indian labor laws are so strict that the labor market needs to be decriminalized before it is deregulated. Given the population’s size and nationalism, many Indians are skeptical of foreign businesses and prefer to focus on the large domestic market. The 1991 reforms rolled back some of those impulses in policy, but plenty of “regulatory cholesterol” persists.
As far as this Adani Group issue is concerned, though, India has a chance to take one step in the right direction. “Focus on the many good and bounteously cash-yielding businesses and assets more sharply, rebuild what just got broken, and hope that the market will love you again in the course of time. This would be good capitalism,” Gupta wrote. Indeed, it would, and that would be good news for the world.