On the surface it was a huge mismatch—David versus an army of Goliaths. Yet in a matter of days a report by Hindenburg Research, a fledgling short-selling firm, resulted in a fall of tens of billions of dollars in the wealth of Gautam Adani, one of the world’s richest men and a close associate of Narendra Modi, India’s prime minister. Along the way, a $2.5bn share offering by Adani Enterprises, flagship of the Adani Group’s listed companies, came close to derailment. Hindenburg alleged that Adani is a giant con. Adani countered that the charges are baseless and, moreover, count as an attack on India itself.
The ultimate success of the share offering, which closed on January 31st, may appear to leave the matter closed. Several foreign investors, including International Holding Company, an investment firm based in Abu Dhabi, have put in bids. This will be seen by many in India as a victory over a malicious short-seller. For critics of Mr Adani, however, it shows only that his business, which includes everything from operating ports to generating electricity, is too important to be allowed to fail. Neutral observers have been left with nagging questions about the finances of one of India’s biggest firms.
The allegations are startling. Hindenburg claims that offshore shareholding entities based in Mauritius and elsewhere are not independent shareholders but are instead fronts for the Adani family. These entities, it alleged, accounted for much of the trading in the group’s shares and pumped up the prices of Adani’s seven listed companies to stratospheric levels. The short-seller further claims that Adani uses offshore vehicles to hide losses and to launder money through Adani’s listed companies.
In a 413-page document released on January 29th, the Adani Group rebutted these charges, arguing they had already been thrown out by India’s courts and regulators. Adani has also threatened legal action (bring it on, said Hindenburg). Although the firm managed to raise the capital it needed, its defence has not entirely inspired confidence. The share prices of several Adani companies, including Adani Enterprises, are still falling and more than $70bn has been wiped off the group’s market value. At one stage some of the group’s bonds were trading as low as 70 cents on the dollar, a price that usually denotes financial distress.
Verifying the more startling charges in Hindenburg’s report is no straightforward matter. They may ultimately be settled by legal action outside India. What seems clear is that Adani shares are closely held and thinly traded; that the group’s acquisition spree of the past few years was fuelled by borrowing; and that the explosion in Adani share prices was at odds with the capital-heavy, utility-like businesses it owns—which are not in sectors where investors can reasonably hope for explosive profits.
The drama of recent days also reveals the risk of relying too much on tycoons to propel investment in infrastructure. For many in India, including the Modi government, firms such as Adani are crucial vehicles for building much-needed roads, railways, airports and green power plants. Yet such a model ties the fate of India’s infrastructure to the integrity of its tycoons. Adani alone now accounts for 7% of the capital spending of India’s 500 largest listed firms. If the group makes good on its plans over coming years, that share could well rise further.
All the more reason, then, to clear the air around the firm. India needs to mobilise domestic savings to invest in its future. It will also continue to rely on foreign capital and expertise to finance its development. So it is important that the country’s capital markets are above board and seen to be so. A good place to start would be for the Securities and Exchange Board of India, the markets regulator, to declare the status of any ongoing probes into the Adani Group.
India has an exciting growth story. It has a young population, a vast and increasingly integrated single market, and a thriving business culture. But were people to lose faith in the finances of the country’s largest firms or the oversight of its institutions, the shine would quickly come off. ■
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