By Andy Mukherjee
A busy weekend for India’s top judges and its No. 1 infrastructure player marked the end of the beginning of the most serious global scrutiny of the country’s corporate-governance record under Prime Minister Narendra Modi. What starts now is some hectic preparation for the denouement.
Supreme Court Chief Justice D Y Chandrachud said on Friday that his three-member bench had received the findings of an expert panel it had set up in March to look into any regulatory lapses in the wake of a short-seller’s report against the Adani Group, a conglomerate from Modi’s home state of Gujarat. On Monday, the court may decide if it will give the market regulator more time for its probe into Hindenburg Research’s fraud allegations that the group has repeatedly denied. Meanwhile, two of its companies, including the flagship Adani Enterprises Ltd., on Saturday announced a plan to raise as much $2.6 billion (Rs 21,373 crore).
The symbolism of the move won’t be lost on investors. New York-based Hindenburg’s January 24 report torpedoed Adani Enterprises’ $2.4 billion (Rs 19,728 crore) public offer by alleging that Gautam Adani, then the world’s third-richest man, was “pulling the largest con in corporate history.” A vigorous rebuttal by the conglomerate failed to save the sale, or stop a stock-price rout. But then four months passed. Companies in the group provided fresh evidence of robust sales and profit. A reputed emerging-market investor wrote a near-$2 billion (Rs 19,727 crore) check to buy stock from the founders, helping them lighten their debt load. Meanwhile, the 166-year-old Credit Suisse Group AG, whose private bank had stopped accepting the group’s bonds as collateral for margin loans to wealthy clients, ceased to exist.
Yet, for all that validation — karmic and otherwise — the energy-and-transport behemoth’s stock-market value is still more than $100 billion (Rs 8 lakh crore) lower than in January. It also remains the subject of a court-monitored investigation by the Securities and Exchange Board of India, or SEBI, into any violation of minimum public shareholding, any failure to disclose transactions with related parties, or manipulation of stock prices. The political spotlight on the group’s connections with Modi, whose party lost a crucial state poll on Saturday ahead of next year’s general election, is also not going away soon. Adani has said that he hasn’t benefited from the proximity. Modi has deflected the issue.
So what did Adani do while the judges spent the weekend reading the expert panel’s report to decide if they should grant the regulator’s request for six more months to conclude its probe? The group cleared the decks for a bold fundraising by Adani Enterprises and Adani Transmission Ltd. that will hit three goals: One, it would compensate for the botched January offer. Even after pruning capital expenditure, the group needs more skin in the game to construct a second Mumbai airport, build new power transmission lines and do everything else to stay in pole position.
Two, a fresh vote of confidence from large institutions would buttress Adani’s appeal to the broader equity market where the latest setback has been loss of representation in MSCI Inc.’s India index for two of the group’s stocks.
Finally, the fundraising preempts any regulatory action. The SEBI is belatedly burning the midnight oil, after years of ignoring calls from lawmakers and the media to put Adani’s Mauritius-based investors under closer scrutiny. Opposition lawmaker Mahua Moitra has vowed on Twitter to “raise Cain” if the regulator allows the group “to raise even a rupee of equity” before finishing its inquiry. But qualified institutional placements, or QIPs, won’t require prior SEBI approvals.
Why is that important? Page 28 of Adani Enterprises’ January public offer prospectus gives a clue. First, it talks about how SEBI’s investigations department asked four publicly traded group companies a bunch of questions about “shareholders holding more than 1 per cent stake, chronology of compliance with minimum public shareholding and association with certain identified persons/entities” in November 2020. The firms sent their answers that very month. But since then, nothing has happened: no proceedings, no show-cause notices, no communication.
This is what has changed. Now that the Supreme Court has gotten involved, the regulator can’t go back to sleep. The same offer document makes a candid assessment of the risk factors:
“… in the event SEBI is not satisfied with the responses provided or has made a prima facie determination that relevant Adani group entity are in breach of law, SEBI may initiate regulatory proceedings against such entities, its promoters or directors and may impose fines or penalties on such entities. SEBI has broad powers to take action or issue directions in the interests of investors and the securities market, including through imposition of monetary penalty, debarment from accessing capital markets, restrictions on undertaking certain activities, etc. The nature of action that may be taken by SEBI pursuant to an adverse determination in a regulatory proceeding would depend on the nature of proceedings initiated by SEBI.”
In 2017, the SEBI banned Reliance Industries Ltd. for a year from the equity-derivative market after an investigation into alleged manipulative trading in the shares of a group company nearly a decade earlier. The country’s largest private-sector firm appealed, calling the sanctions unjustifiable. After a further four years, in 2021, SEBI imposed a combined $5.5 million penalty on Reliance and its Chairman Mukesh Ambani. His share of the fine was a princely $2 million (Rs 19727 crore).
That track record, however, may be deceptive in the current case. Hindenburg’s allegations have put SEBI's own credibility, and that of the Indian market, under a cloud. Prudence dictates that the Adani Group should be ready to deal with any temporary loss of market access, just in case. That could be the third reason to rush the fundraising plan.
A share sale isn’t guaranteed. A Bloomberg News analysis has shown that Adani Enterprises and Adani Transmission have sought board approvals for fundraising every year in April or May since at least 2019. Adani Green Energy Ltd. secured such permission every year except in 2021. Yet, the only equity that was actually raised was last year when these three firms scooped almost $2 billion from Abu Dhabi-based International Holding Company PJSC, or IHC.
IHC, which was also a prominent participant in the cancelled January sale, has said that it is not contemplating new investment. Either it will change its mind, or other backers will step up. Florida-based GQG Partners, for instance, might want to double down on its $1.9 billion exposure in the flagship that it got 57 per cent cheaper in March than in the pulled offer. State-owned Life Insurance Corp. of India, another anchor investor that failed in January to add to its then-4.23 per cent stake, may also be keen.
The group needs a thicker equity cushion for growth and a revival of its stock-market cred, and it needs both of those things fairly soon. The court might give SEBI a further three months or six, but this time the probe will conclude, and Adani may have to live with the outcome.