Adani probe will only produce heat, not light

By Andy Mukherjee

Thanks to a 173-page report by a six-member panel appointed by India’s Supreme Court, we now have a fairly good idea of where the country’s probe into the Adani Group is headed: Nowhere.

It has never been too hard to look under the hood of the foreign investors that have propped up the infrastructure behemoth over the years. As many as 12 funds and one overseas financial firm owned a combined stake of between 14 per cent and 20 per cent in five out of the six publicly traded Adani companies in March 2020, according to the Securities and Exchange Board of India’s own submission to the committee. The entities may be opaque, but they have all disclosed their beneficiary owners. They include an Alastair Guggenbuhl-Even in Switzerland; a Jan Scheelings in the Netherlands; a Raj Bhatt in the UK; a Yajjadeo Lotun in Mauritius; and an Adel Hassan Ahmed Alali in the United Arab Emirates.

But just who are they? A year-and-a-half before a New York-based short-seller put the spotlight on a couple of them and their alleged connections with the founders of the Ahmedabad, Gujarat-based conglomerate, India’s government had announced most of these names in parliament in response to a lawmaker’s question. The Adani Group issued a strong rebuttal to Hindenburg Research’s Jan. 24 report and said that “innuendoes” that any of the public shareholders “are in any manner related parties of the promoters are incorrect.”

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It’s entirely possible that these people are tangential, or even irrelevant, to the Adani saga. Their control over the offshore structures makes them beneficial owners as per India’s anti-money-laundering law. But the real persons of interest may be those who own the economic interest. According to the committee, the SEBI has been following the money trail of the 42 investors who have contributed capital into these funds to figure out if they’re mere fronts for the tycoon Gautam Adani and his family. It’s a suspicion the SEBI has investigated “for years before the Hindenburg report,” says the panel of experts. If there’s any substance to those doubts, then one or more of the group’s publicly traded companies may not really be “public” as per securities law.

The Supreme Court had set up the committee in March, under one of its former judges, to look into any regulatory lapses in the wake of the short-seller’s report. The panel has gone back and told the court that it will not be possible for it to return a finding of regulatory failure. Adani stocks rose after the report became public Friday. The business group is yet to comment.

Credit: Bloomberg Photo

Not being able to reject the null hypothesis doesn’t invalidate the alternative, though. A more powerful scrutiny by lawmakers might have yielded a different finding. I’ll have more to say on that in a bit, but for now it’s interesting to take note of the panel’s characterization of the SEBI’s ongoing probe into the 42 contributories in the 13 funds that helped propel Gautam Adani to near the very top of the global wealth league before the precipitous fall in the last four months. It is potentially “a journey without a destination,” it says.

That’s because if you dig into any of the names among the 42, belonging to Cayman Islands, Malta, Curacao, British Virgin Islands, Bermuda, Ireland and the UK, you may find another hard to-decipher company, or offshore fund. Dig deeper, and you’ll be presented with another inscrutable structure. “It would be a humongous task to figure out who the ultimate beneficial owner is,” the experts say in their report.

The court has asked the regulator to wrap up its investigation by Aug. 14. While the committee doesn’t explicitly say it, three more months — or even 30 — may not help. As a rule maker, the SEBI has gone soft, frustrating its own enforcement wing. In 2019, the regulator dropped from its rule book the very provision dealing with "opaque structure.” After that tweak, it was no longer necessary for a foreign fund “to be able to disclose every ultimate natural person at the end of the chain of every owner,” the expert panel says. In other words, even if Adani has violated the minimum 25 per cent public shareholding norm, the SEBI may never be able to prove it. Not when the other Indian investigating agencies that the regulator has approached for help don’t seem too keen to get involved.

The SEBI has already asked Adani if investments by these foreign funds into his publicly traded companies have been funded by his group. He has denied it. In response to Hindenburg’s allegations, the conglomerate has said what it always has: “A listed entity does not have control over who buys/sells/owns the publicly traded shares or how much volume is traded, or the source of funds for such public shareholders nor is it required to have such information for its public shareholders under laws of India.”

Before Hindenburg came along, “SEBI had hit a wall,” says the panel. Even now, a breakthrough is unlikely. To not be able to peer into the identity of the unnamed 42 investors — or those bankrolling them — means that the 13 funds they have invested in must also remain a black box.

Minimum public shareholding was the most promising investigative lead among the three that the court had asked the SEBI to pursue. When it comes to non-disclosure of related-party transactions, the regulator has already scored another own-goal by being so exhaustive in specifying who it considers to be a related party that anyone can slip between the rules and yet stay within the law. The third line of inquiry, which pertains to stock-price manipulation, is a dead end. Or that’s my read of the expert panel’s description of where the investigation is currently at.

Having dealt with the immediate questions, the committee goes on to make some longer-term recommendations, such as assembling a multi-agency task-force with a short shelf-life to carry out super-crucial investigations. That’s highly unrealistic. In the Adani episode, while Hindenburg’s focus was on the group’s dealings in the stock market, India’s opposition parties have pounced on the report and made it all about Prime Minister Narendra Modi’s close links with the businessman from his own state. Adani denies having benefited from these connections. Modi has refused to even talk about them. A “systemically important investigation” that involves not just the financial but also the political system can’t possibly be run — as the expert panel recommends — under the aegis of the Financial Stability and Development Council, which is headed by the finance minister.

Perhaps the most telling part of the report is the committee’s own unwitting acknowledgement of its powerlessness. It had asked JPMorgan Chase & Co., Goldman Sachs Group Inc., Citigroup Inc., Bank of America Corp. and Morgan Stanley to come and present. “None of the international securities firms and banks were desirous of engaging in the matter,” it said in its submission to the court. Why should a Wall Street bank with an important emerging-market franchise to protect go anywhere near a political hot potato unless it’s compelled?

This suggests that Rahul Gandhi’s Congress Party, the main opposition, may be right to ask for a joint parliamentary committee, which has far greater powers to summon witnesses. The government hasn’t heeded that demand. A toothless expert panel looking over the shoulder of a regulator that has its suspicions but no evidence, and no hope of generating any without the help of other sleuthing agencies, means only one thing: No matter how long it goes on, the Adani probe will only produce heat, not light.