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His fortune started tumbling as the Adani Group has shed $108 billion in
market value since Hindenburg Research accused it of stock manipulation
and accounting fraud in a January 24 report.
The downhill journey sent Adani himself sliding from No. 2 among the world's
wealthiest, to No. 21 on the Bloomberg Billionaires Index.
The tycoon’s scrapping of $2.4 billion share sale this week made clear the
potential for lasting impact. Adani's rebuttal had failed to reassure investors.
The small, but famed, US short-seller's feedback revived old suspicions about
corporate governance at the Adani conglomerate.
According to critics, Adani’s closeness with Prime Minister Narendra Modi for
decades has held him in good stead. They say Adani’s business — with
investments in capital-intensive projects such as airports, power plants, and
data centers — is at the core of Modi's growth agenda.
The crafty tycoon’s access to the powers that be helped him to get business
benefits. His aligning of business goals with Modi's development initiatives
speaks of a symbiotic relationship between them.
Fear runs deep among investors in the thought that if the slide in asset prices
continues and further shakes their confidence in Adani's empire, that would
be a setback for India's growth story.
Adani conglomerate fiasco came at a time when banks like HSBC Holdings
Plc and companies such as Apple Inc. are eyeing India for business
expansion. It is likely to cost India dear when the Asian superpower is trying
to elbow out its rival China in projecting itself as one of the best investment
destinations in the world.
According to Alicia Garcia Herrero, Chief Economist for Asia Pacific at Natixis
SA, Adani's scandal is not coming at the best of all times for India as China is
lifting Covid restrictions.
On January 24, Hindenburg, in its report, alleged that Adani Group companies
are artificially overvalued due to accounting fraud. According to the short
seller, the seven listed companies of the Adani Group have an 85% downside
on a fundamental basis due to excessive valuations.
The report pointed out that the group companies are indebted to an extent
that should have brought their share prices down, but this has not happened.
"Key listed Adani companies have also taken on substantial debt, including
pledging shares of their inflated stock for loans, putting the entire group on
precarious financial footing. 5 of 7 key listed companies have reported
‘current ratios’ below 1, indicating near-term liquidity pressure," the report
said.
As to why a massive multinational should commit fraud, the report took pains
to point out that Gautam Adani, Founder, and Chairman of the Adani Group,
has amassed a net worth of roughly $120 billion, adding over $100 billion in
the past 3 years mainly through stock price appreciation in the group’s 7 key
listed companies, which have spiked an average of 819% in that
period. Hindenburg characterised the group's meteoric rise as "the largest
con in corporate history."
The findings of the report on Adani were based on interactions with dozens of
individuals, including former senior executives of Adani and also reviewing
thousands of documents, and conducting diligence site visits in almost half a
dozen countries.
While many of the claims have circulated among the Indian investing class
and media for years, their emergence in the global conversation seemed to
trigger a crisis of confidence.
Though the timing of the report is questionable as it was published just a day
before the FPO on January 25, its claims have raised serious questions on
corporate governance. It has triggered all stakeholders from investors
including the State Bank of India, the country’s largest bank, and the
country’s largest insurance company, LIC, to issue clarifications on their
limited exposure to the Adani Group.
In a 413 page response to the Hindenburg research, Adani Group termed the
report baseless and allegations "unsubstantiated speculations". “It is
tremendously concerning that the statements of an entity sitting thousands of
miles away, with no credibility or ethics has caused serious and
unprecedented adverse impact on our investors," the Adani Group said.
The group also called the report, "not merely an unwarranted attack on any
specific company but a calculated attack on India."
Hindenburg Research, based in New York, is barely five years old and was
founded by a CFA and chartered alternative investment analyst, Nathan
Anderson, who has publicly declared himself passionate about uncovering
fraud and scams.
The short seller said the Adani response did not address any of the
substantive points that the report raised. Rather, Adani has 'stoked a
nationalist narrative' that seeks to conflate the 'meteoric rise and the wealth
of its chairman, Gautam Adani, with the success of India itself'.
The sudden slump in Adani stocks pushed Gautam Adani to call off his FPO
even after it was fully subscribed. Adani said the decision was made by the
board to protect the interest of the investors and the money raised would be
returned.
What was set to be a historic FPO for the Indian stock market had to be
withdrawn. This further dented investor confidence and Adani stocks
continued to bleed.
The Reserve Bank of India (RBI), the country’s central bank, launched an
inquiry to assess the dealings of the Adani Group and its exposure to various
Indian banks. The RBI had asked banks to share the details of loans and other
transactions that have or were to take place between them and any of the
Adani companies.
The RBI allayed investors’ concerns and said the banking sector remains
resilient and stable. The RBI states that it keeps a constant vigil on the
banking sector and on individual banks to maintain financial stability.
International giants including brokerage firm Credit Suisse and the wealth
investment arm of Citigroup Inc said they have stopped accepting bonds of
Adani-led companies as collaterals for margin loans in their bid to intensify
their scrutiny on the beleaguered Adani Group post allegations.
Some ratings agencies are said to have begun examining the risks associated
with the Adani Group’s debt and creditworthiness. CRISIL in a statement said
it was monitoring the Adani Group and all outstanding ratings on the Group’s
entities are under continuous surveillance. Fitch Ratings has clarified there is
no immediate impact on the credit ratings of Adani companies.
Dow Jones said it was removing Adani Enterprises from its Dow Jones
Sustainability Indices effective from February. 7 following allegations of stock
manipulation and accounting fraud. Adani Enterprises entered the index only
two months ago.
The expulsion may seem unimportant, but the move hints at the international
investor community’s distrust of the Adani Group. Fears of misgovernance and
corporate fraud in a country, which was being touted as the world’s top
investment destination as recently as last month at the World Economic
Forum in Davos, may have contributed to market mayhem led by Adani
Group’s stocks.
In a bid to win investor trust back, Gautam Adani had called off a fully-
subscribed FPO and has since clarified the Group’s balance sheet is “very
healthy with strong cash flows and secure assets”, and the Group has an
“impeccable track record of servicing their debt”.
Adani Group has rubbished the Hindenburg report and has said it was mulling
legal action against the firm, a move the short-seller has welcomed.
We'll have to wait and see how investors see the Adani stock mayhem. At the
moment, it is clear the Hindenburg report has opened the floodgates for the
Adani Group to come clean on its balance sheet and refute allegations in all
manner possible.