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Why do these foreign funds love

Adani Group companies?

What would you call it if, year after year, certain foreign funds
invested the bulk of their assets in the companies belonging to one
corporate group? Despite the stocks reaching all-time highs, these
funds have seldom booked profits and reduced their holding in the
group companies. 

That is just what a set of foreign funds or foreign portfolio investors

(FPIs in market parlance) who appear to be obsessed with stocks of
Adani Group companies have done. Despite the recent rally in the
Adani stocks, when the group entered the coveted $100 billion dollar
club, these funds have rarely booked profits. 

For Elara India Opportunities Fund, the only India opportunity seems
to lie with the Gujarat-headquartered group—97% of its net worth
comes from Adani companies. 

It’s the same for Albula Investment Fund Ltd, with 95% of its net
worth coming from Adani Group stocks. For Cresta Fund, 97% of its
net worth is from just three Adani group companies, while 96% of
Apms Investment Fund Ltd’s net worth comes from four Adani
companies. More of the same for LTS Investment Fund and Vespera
Fund. 
One last fund in our review is Asia Investment Corporation
(Mauritius) Ltd, which is the exception in that only about 35% of its
holdings are in Adani companies. But we’re considering it along with
the rest for a reason.
All of these funds are among the biggest FPI shareholders in Adani
companies—but marquee Nifty 50 stocks rarely feature in their
portfolios. 

For any asset manager and investor this is a huge concentration risk.
This becomes even more curious if we consider that the portfolio of
these funds has remained almost the same quarter-on-quarter and
year-on-year. There has been some reduction or increase in the
number of shares held over the years, but these changes in shares
held is relatively small as compared to the overall holding maintained
since 2015, which is the earliest year for which data is available. 

This is very unusual for FPIs. As a class of investors, they are typically
non-sticky money and are prone to selling on bad news or to book
profits.  

“Committing such a large part of one’s investment portfolio to a

single business group, certainly makes the imagination wander.  Most
possibilities raise further questions,” said R. Balakrishnan, an
independent financial consultant and expert.

So who are these seven foreign funds and what value they are seeing
in Adani Group companies that perhaps the best of domestic and
foreign institutional investors are missing out?

This is the second instalment of a series of stories in which we try to

understand the Adani group of companies. The first part traced the
expansion of the companies led by Gautam Adani to the behemoth
they have become today. Read it here. 

The common FPIs

From the first COVID-19 wave last year to the second devastating
wave now, the two big conglomerates led by billionaires Mukesh
Ambani and Gautam Adani have been clear winners. While Ambani’s
Reliance Industries was able to attract billions of dollars in strategic
foreign investment for its telecom and retail subsidiaries, the Adani
Group companies touched all-time high valuations. 

Take Adani Green Energy and Adani Total Gas, for instance—the
return on equity for these two companies over the past one year is
424% and 1,041%, respectively. For comparison, the Nifty’s return for
the same period stood at 56.8%. 

Five out of the six publicly listed Adani companies have a valuation of
more than Rs 100,000 crore: 

Adani Ports and SEZ Ltd (Rs 147,000 crore)

 Adani Enterprises (Rs 126,000 crore)
Adani Total Gas (Rs 130,000 crore)
Adani Transmission (Rs 117,000 crore)
Adani Green Energy (Rs 164,000 crore)

Such jumps in valuation would prompt most investors to book profits

at some point, but these seven foreign funds have remained steadfast
in their commitment towards the group. A confidence that these
companies have not found from other big FPIs, mutual funds or
insurance companies. 

This suite of seven foreign funds are all registered in Mauritius, a tax
haven and the second-largest source of foreign investment in Indian
markets.  

The island nation is generally subject to increased monitoring across

the world, given that it has been placed on the Financial Action Task
Force’s grey list, which flags jurisdictions that are used for terror
financing or money laundering. On 25 February 2020, the Securities
and Exchange Board of India had notified that Mauritius-based funds
would be subject to stricter know-your-client disclosures, compliance
and regulatory scrutiny. This continues till date. 

According to data analysed from market data platform Trendlyne and

global company database Opencorporates, the seven foreign funds
present a curious picture. 

Let’s tackle them one by one. 

Elara India Opportunities Fund incorporated on 2 March 2006. As of
the quarter ended 31 March 2021, the fund had a net worth of Rs
21,659 crore, out of which Rs 21,124.5 crore comes from investing in
five Adani group companies. It owns 4.4% in Adani Enterprises, 2.3%
in Adani Green Energy, 4.7% in Adani Transmissions, 3.8% in Adani
Total Gas and 2.4% in Adani Power. 

The sixth largest holding is JSW Holdings Ltd but the difference in
holding as compared to the fifth largest holding is wide. Elara India
Opportunities Fund holds over 10 crore shares of Adani Power and
4.2 lakh shares of JSW Holdings. 

Clearly this fund, whose parent company is headquartered in India,

has immense faith in India and more specifically in Adani group
companies. 
Cresta Fund was set up in 2007, the same year Adani Ports and SEZ
Ltd went public. The fund publicly holds 14 stocks with a net worth of
over Rs 10,124.8 crore; out of this, Rs 9,861 crore comes from three
listed Adani companies. The fund’s fourth largest holding is in Jindal
Saw Ltd, for a measly Rs 82.6 crore. 

Albula Investment Fund was set up in 2007 and publicly holds 20

stocks with a net worth of over Rs 11,998.8 crore; of this, Rs 11,450
crore is from four Adani companies. 

In terms of the quantity of shares held its top four holdings are in
Adani companies. The difference in shares held between the fourth
largest holding and fifth largest holding is wide at about 1.3 crore
shares. 

Apms Investment Fund publicly holds 11 stocks with a net worth of

over Rs 11,639.9 crore. The top four holdings are Adani Green Energy,
Adani Total Gas, Adani Enterprises and Adani Transmissions. 

It holds 1.9 crore shares of Adani Transmissions and the fifth largest
holding is Rajesh Exports at about 69 lakh shares. 

Asia Investment Corporation (Mauritius) has investments in six

stocks, with a total net worth of over Rs 5,571.9 crore. Its top two
holdings are Adani group companies. 

Albula Investment Fund, along with Asia Investment Corporation

(Mauritius), is part of the data dump referred to as the Paradise
Papers, analysed and reported by the International Consortium of
Investigative Journalists. This involved leaks from offshore services
firms that serve as conduit for routing income overseas in tax havens.
Apms Investment fund, Albula and Asia Investment Corporation have
a common director who has been flagged in the Paradise Papers. 
According to the Paradise Papers, Albula Investment Fund, Cresta
Fund and Asia Investment Corporation all have a common address:
Les Cascades Building, Edith Cavell Street, Port Louis, Mauritius.
LTS Investment Fund is another such fund in Mauritius set up in May
2011. Its top four holdings are in Adani group companies. In terms of
number of shares held, the fourth-largest holding is Adani
Transmission at 1.8 crore shares and fifth-largest holding is in little
known Kiri Industries at 19 lakh shares. 

What does this mean?

Is this a violation of rules or guidelines? No. But does it raise
eyebrows? For various reasons, yes. Potentially, such holdings could
give a false impression of the free float or public shareholding of a
company, and perhaps make the stock prices easier to manipulate. 

The higher the valuation of the company, the more interested retail
investors would be in buying the stock. Companies may find it easier
to enter into global indices. Additionally, the higher valuation also aids
in raising fresh capital. 
“Market price has today become a critical point in the fundraising
exercise. Everything from cost of capital, dilution and leverage are a
derived function of market price,” says Balakrishnan, the independent
financial consultant. 

In part one of this series, we had pointed out that Adani Group
companies have a very high promoter shareholding. In five out of the
six listed entities, the public shareholding is the bare minimum
required under SEBI norms, which is 25%.

Consider Adani Enterprises Ltd. Public shareholding in the company is

25.08%; foreign portfolio investors account for most of this public
shareholding, with a combined stake of 20.26%. Of this, the set of
foreign funds that we have analysed account for most of the
shareholding, with a total of around 15%. If you remove these funds
from the picture, the effective public shareholding or free float in
Adani Enterprises comes down to just about 10%.

We’ll take one more example: Adani Transmission Ltd. Public

shareholding in the company is 25.1%. Out of this, foreign investors
hold 19.91%, and of that, our set of seven funds hold over 17%.
Remove them, and the effective public float is about 7-8%. 

The same story plays out in the other four companies as well. 

The reason why this is important is best illustrated by Adani Green

Energy.

In December 2019, the public shareholding in the company was 25%,

most of it held by foreign investors. Shares held by individual
shareholders was just 1.99% of its capital. This was true until
December 2020, by which time the value of the company’s shares
shot up Rs 140 to Rs 1,120. The price increase largely appeared
speculative as over 90% of shares—held by promoters and a bunch
of foreign investors—didn’t change hands. The promoters of Adani
Green Energy then divested 20% of their stake to investors, receiving
a handsome sum of $2 billion.

Now, Adani Green Energy is a long shot. The renewable energy

company is trying to ramp up its solar power production by adding
another 8 gigawatts of installed capacity. This is the kind of project
that has a long gestation period and is unlikely to roll in significant
profits anytime soon.

Now, if the foreign portfolio investors were to exit the stock now as
there isn’t a clear upside visible for the next several quarters, new
investors in the stock at high prices are going to be stuck. This is a
possibility in most Adani companies with high promoter holding. 

Interestingly Adani Ports and SEZ Ltd, the only company in the group
with a higher than minimum public shareholding at 36.26%, does not
have any of the seven foreign funds we’ve looked at as shareholders. 

“The portfolio holdings of these FPIs make them almost like a special
purpose vehicle set up for investing only in Adani Group companies. It
gives an incorrect impression of public float. Pick up any other big
foreign fund and they would have a diversified holding,” said a foreign
institutional investor, who asked not to be named. 
Large, well-known foreign funds tend to keep their India-specific
holdings diversified. Let’s take the Europacific Growth Fund, part of
the Capital Group. It publicly holds 11 Indian stocks with a net worth
of over Rs 93,711.7 crore. Its top Indian holdings are spread across
several significant Nifty companies—Reliance Industries, HDFC Bank,
Kotak Mahindra Bank, ICICI Bank and Axis Bank—and there is little
concentration risk. 

Oppenheimer Developing Markets Fund of the Invesco Group holds

five stocks with a net worth of over Rs 32,752.2 crore and they are
HDFC Ltd, Kotak Mahindra, Zee Entertainment, Oberoi Realty and
Godrej Properties.  

The principle behind SEBI’s requirement that at least 25% of a listed

company’s shares be held by public shareholders is that it is a way to
ensure better corporate governance and scrutiny. Public
shareholders’ approval is required for related-party transactions, for
instance. A question to be asked here is whether the foreign funds
who are deriving over 92% of their net worth from Adani Group
companies would object to any proposals floated by the company.

SEBI has limits for how much of its assets a domestic mutual fund can
invest in a single company or group. But there are no such
restrictions on foreign investment funds.

A foreign fund would be operating under different strategies, across

multiple markets, to deliver higher returns to its investors. Imposing
any sort of India-specific threshold would be a fool’s errand. The only
restriction is that any foreign portfolio investor cannot hold more
than 10% in a listed company; beyond that, it becomes foreign direct
investment. 

Sometimes, such fund structures also give rise to suspicions of

round-tripping—i.e. that it is the promoters of the company who
have routed their own money through overseas jurisdictions and tax
havens into funds that invest in their own companies.

SEBI has been continuously working to stymie the issues of round-

tripping and money laundering by increasing its scrutiny of what is
known as ultimate beneficial ownership. This basically entails tracing a
path through layers of corporations, funds and investment vehicles to
determine who ultimately has ownership or control over a specific
fund or company. 

The capital markets regulator also has other restrictions aimed at

preventing money laundering or round-tripping through foreign
investment funds, such as limits on how much of the assets of such a
fund can be held by Indian citizens. 

Whether these common FPIs in Adani group companies are bearer of

bad news we cannot guess. The only authority who can perhaps
check out the credential of these funds is SEBI and its impeccable
surveillance powers.

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