Adani's Rs 8.8 lakh crore crisis shakes investors' faith in India

By Abhishek Vishnoi, Ishika Mookerjee, Chris Kay, and Michelle Jamrisko

Just 10 days ago, Gautam Adani and his sprawling energy-to-ports empire looked invincible. Now, a damning short-seller attack has left the billionaire battling the worst crisis of his corporate life — and is raising bigger, darker questions about India’s credibility as a global growth engine and a destination for international investors.

The Adani Group has shed $108 billion (Rs 8.85 lakh crore) in market value since Hindenburg Research accused it of stock manipulation and accounting fraud in a Jan. 24 report. But it was only when the tycoon scrapped a $2.4 billion (Rs 19,600 crore) share sale this week that the potential for lasting impact became clear. Adani’s rebuttal had failed to reassure investors. Once ranked No 2 among the world’s wealthiest, he has tumbled to No 21 on the Bloomberg Billionaires Index.

The small, but famed, US short seller has revived old doubts about corporate governance at the Adani conglomerate. The fallout from its almost 100-page report threatens to undermine investor confidence in India more broadly, and in the nation’s regulatory framework — whether its claims ultimately prove to be true or not.

“Things are moving very fast in the market, with a potentially major reassessment of the risks of investing in Indian equities by international investors,” said Singapore-based Gary Dugan, chief executive officer of Global CIO Office, an asset manager and financial advisory firm. “That reassessment includes governance, corporate transparency, nepotism and indebtedness.”

Adani, 60, has been close to Prime Minister Narendra Modi for decades. And his business — with investments in capital-intensive projects such as airports, power plants and data centres — is at the heart of Modi’s growth agenda. As a national champion, the tycoon has aligned his business interests with Modi’s development goals, often stepping in where the state lacks resources or competence, helping create thousands of jobs.

If the slide in asset prices continues and further shakes investor confidence in Adani’s empire, that would be a setback for India’s growth story at a pivotal time. Banks like HSBC Holdings Plc and companies like Apple Inc. are expanding in India to hedge their exposure to China, where a government crackdown on businesses and an erratic pandemic policy have turned investors wary.

“The truth is that Adani’s scandal is not coming at the best of all times for India as China is reopening,” said Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis SA. “Foreign investors are clearly watching.”

Hindenburg, in its report, alleged that Adani used offshore shells for money laundering and siphoned from listed companies. The short seller, which took a position in offshore Adani securities, characterized the group’s meteoric rise as “the largest con in corporate history.” 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. Hindenburg has repeatedly declined to comment on its short positions on Adani.

In a 413-page response, Adani said Hindenburg’s conduct was “nothing short of a calculated securities fraud under applicable law.”

But the damage was done.

Eight of the 10 worst-performing stocks in the MSCI Asia Pacific Index this year are now Adani firms, while bonds issued by the Indian billionaire’s flagship company have fallen to distressed levels in US trading.

The turmoil has not only hammered Adani Group shares but is also hitting banks that have given loans to the companies. Government-controlled State Bank of India has tumbled 11 per cent since the Hindenburg report came out. Foreign institutional investors pulled a net $2 billion (Rs 16,435 crore) out of India’s stock market from the country from Jan. 27 through Jan. 31, the biggest three-day selloff since March, according to data compiled by Bloomberg.

“The Adani-related headlines are generating a high level of negative attention, which could dampen investor appetite for Indian stocks,” said Jian Shi Cortesi, a fund manager at Zurich-based GAM Investments, which oversees more than $80 billion in assets. “While we don’t see Adani dragging down the whole Indian stock market, we think this could lead to India underperforming other Asian markets such as China.”

However, some veteran emerging-market investors like Mark Mobius remain unfazed by the meltdown and dismissed chances of a broader contagion.

“This does not reflect the overall viability of the Indian market and economy,” said Mobius, co-founder of Mobius Capital Partners LLP. “We don’t make decisions based on the index but on the viability of individual companies over the long term.”

Hugh Young, Asia chairman of abrdn Plc, which managed more than $600 billion in assets as of June, said his fund is waiting to dive in after the declines.

Adani’s Defense

But it’s apparent even to casual observers that the declining fortunes of the Adani empire have the potential to shake the fundamentals of the Indian economy in a way few other corporate crises can. In fact, Adani’s key line of defence is to braid together the fate of his conglomerate with that of Asia’s third-largest economy.

Hours after pulling the share sale, Adani reiterated in a televised speech that the fundamentals of the company are strong, the balance sheet is healthy and the decision won’t affect existing operations and future plans. Clad in traditional attire, he signed off with two words at the end of his televised speech Thursday: “Jai Hind,” meaning “Victory to India.”

Days earlier, Chief Financial Officer Jugeshinder Singh stood in front of a fluttering Indian flag to reject Hindenburg’s allegations.

For years, Adani companies have delivered the sort of infrastructure projects India has needed. His integrated businesses touch hundreds of millions of Indians each day, from the chain of ports that deliver coal from Adani mines to company power plants running electricity to households through his transmission units.

Along with developing more than 3,100 miles of the country’s road network, Adani Group is the largest private operator of India’s sea and airports, controlling 33 per cent of Indian air cargo traffic and 24 per cent of its shipping capacity, according to the company presentations. The conglomerate plans to plough some $70 billion (Rs 5.74 lakh crore) into renewable energy projects that are key to Modi achieving India’s Net Zero goals.

The group’s expansion has been fueled by leverage, with net debt at about Rs 1.6 lakh crore ($19.7 billion) — another concern that’s been dogging investors. The conglomerate has no dollar debt maturing until 2024. In a sign its debt servicing capacity in the near term looked safe, an Adani unit made a payment for scheduled coupons Thursday.

Having just reported a rather ambitious budget on Feb. 1, the central government now faces questions on whether its infrastructure project plans could be derailed along with Adani, one of its most critical investors.

“There is no doubt that Adani’s star is tethered closely to Modi’s own political trajectory — the conflation of the Adani Group’s interests and India’s national interest is striking,” said Milan Vaishnav, director of the South Asia Program at the Carnegie Endowment for International Peace.

Adani’s beginnings were far from remarkable. A college dropout from the western state of Gujarat, he dabbled in diamond trading in Mumbai before returning home to set up the family’s polymers import-export business that would later become Adani Enterprises.

His ascent thereafter coincided with the rise of Modi, who was elected Gujarat’s chief minister in 2001. Their ties were cemented when Adani defended Modi after the latter was accused of failing to prevent one of India’s worst sectarian riots that killed more than 1,000 people, most of them Muslims, the following year. The charges, consistently denied by Modi, were later dismissed by the nation’s top court. The businessman then helped found a biannual Vibrant Gujarat forum that helped burnish Modi’s image as a dynamic development-focused leader who got things done. In a highlight of the friendship, Modi attended a party Adani threw for the wedding of his son Karan in 2013, a year before Modi was elected as India’s prime minister.

Since Modi came to power, Adani has become the poster child for his administration’s use of private capital to boost infrastructure and domestic manufacturing. Now that the conglomerate’s ability to keep delivering is coming into question, the market crash has spilt into politics, with Modi’s rivals sensing weakness.

The fracas overshadowed the delivery of India’s budget on Wednesday as opposition parties chanted the billionaire’s name. It caused another uproar on Thursday, with lawmakers demanding a probe into the Adani Group following the Hindenburg claims.

“It will have some impact on foreign investment,” said Mohan Guruswamy, a former adviser to the country’s finance ministry. “There will be a loss of confidence in Modi now.”