The Adani affair

On Tuesday the Indian billionaire Gautam Adani was shaking hands with Israeli prime minister Benjamin Netanyahu to mark what should have been a proud moment for his conglomerate. Adani’s ports division completed a deal to take over Haifa’s port for $1.2bn, a landmark foreign investment for Israel and an emblem of a rising and globally expansive Indian business with solid enough credentials to run critical infrastructure in a deeply security-conscious rich country. But back in India, on the Bombay Stock Exchange and in Adani’s headquarters of Ahmedabad, the financial future of his eponymous group was on the line. Hindenburg Research, a New York-based short seller, had the previous week published a bombshell report accusing the 60-year-old’s businesses of engaging in “brazen stock manipulation and accounting fraud”. The Adani group rejects those allegations absolutely. But even as he was preparing to sign the Haifa deal, a $2.4bn share offer by his flagship Adani Enterprises was doing little to stem the collapse in his companies’ share prices. By Friday, the tycoon’s listed companies had lost more than $100bn of their value and the share sale was off. Adani, once the world’s third-richest man, had fallen to number 17 on Forbes’ list of billionaires. Apart from the future of the billionaire and his business empire, something bigger is on the line: India’s probity in corporate governance and pursuit of a development model in which the state has entrusted a few ultra-rich men with running India’s infrastructure and pioneering investments abroad.

The Adani Group acknowledged as much when it portrayed the short seller report as “not merely an unwarranted attack on any specific company but a calculated attack on India, the independence, integrity and quality of Indian institutions, and the growth story and ambition of India”. The storm surrounding Adani comes during a proud year for the country, as it is set to become the world’s most populous nation and chairs the G20 group of leading economies. The fallout risks damaging the country’s status as a top pick of foreign banks’ emerging markets desks. “India has been the relative safe haven market, and the Adani accusations are a cold shower for domestic and foreign investors,” says Charlie Robertson, global chief economist with Renaissance Capital. If regulators and journalists are now empowered to probe any alleged wrongdoing then India could emerge “healthier in the long term”, he adds. But both the government and regulators have so far stayed all but silent on the matter. If the allegations are proved to be true, it would be an embarrassment for Prime Minister Narendra Modi, who has longstanding ties to Adani himself, and a significant risk for the state-owned banks and insurers invested in Adani’s companies. What the Modi government does next has great stakes for India, say opposition politicians, at a pivotal moment in its development. “The pride of India is not the wealth of one industrialist,” says Mahua Moitra, an opposition MP who has pressed regulators to investigate Adani’s companies in recent years. “The pride of India lies in the robustness of its institutional structures,” she says, adding: “There are huge issues flagged now that may affect millions of retail investors in this country.” A profitable relationship The ascent of Adani mirrors that of Modi. Both come from Gujarat, where Modi became chief minister in 2001 shortly before religious violence in the state killed at least 1,000 and temporarily rattled business confidence. Adani became one of Modi’s biggest champions in business, as he built a local industrial empire that helped the future prime minister sell Gujarat as an economic model for India. Their proximity was epitomised when Modi flew in an Adani jet after he was elected to national office in 2014.

The longstanding relationship has coloured Indians’ perceptions of Adani’s clout. “He is perceived to be close to the government,” says Shumita Deveshwar, chief India economist with TS Lombard. “Maybe that comes from the fact that he comes from Gujarat and his ascent in terms of his fortune has overlapped the current government’s tenure.” Adani has been a zealous champion of Modi’s agenda since he came to power, ploughing billions of dollars into areas the government deems priorities. These have included simultaneously investing in mining coal - which India wants to meet fast-growing power demand - and renewable power, a longer-term priority as India sets ambitious targets to decarbonise its economy. This business strategy has proved lucrative, with Adani’s net worth rising from about $7bn in 2014 to more than $100bn before the Hindenburg report, making him one of the world’s richest people. But the pace of his companies’ growth has proved a source of increasing scrutiny at home and abroad, with critics alleging that his proximity to Modi has paid off in leniency by regulators who allowed him to muscle aside rival businesses. A leaked government audit from 2017, for example, alleged that his Adani Power unit received “preferential treatment” that would allow it to charge higher prices for electricity from a coal power plant then being built in the eastern state of Jharkhand. Adani Power said it “strongly refute[s]” allegations about the project. Adani’s relationship with Modi has become a leading attack line of India’s opposition, who have sought to portray the relationship as evidence of cronyism at the highest levels of government, something both sides deny. “All of India’s ports, airports, power, transmission, mining, green energy, gas distribution, edible oil - whatever happens in India, Adani-ji is found everywhere,” Rahul Gandhi, a leader of the opposition Congress party, told India’s parliament in 2022.

Adani has always vehemently denied the suggestion that he received favourable treatment from Modi or anyone else, arguing that his company has always won business through fair and transparent bidding. Indian journalists have in recent years probed aspects of his group’s operations that raised questions, including its debt load, the presence in its shareholder base of funds that almost exclusively held Adani stock, and its links to offshore vehicles based in Mauritius, a tax haven popular with rich Indians. However, reports were carefully worded in a country where editors rely on big corporate advertisers, and the government brooks little criticism. Hindenburg showed no such moderation.

In its report, published on January 24, the short seller claimed, among other things, that the tycoon’s empire used Mauritius-based funds to conceal the true extent of the family’s ownership of Adani companies listed in Mumbai, thus skirting rules governing how much stock insiders can own. It further alleged that Adani’s brother Vinod Adani controls 38 Mauritius-based entities that have moved billions of dollars into public and private Adani companies in India, and that the group’s linked offshore entities made its listed companies appear more creditworthy, allowing them to borrow more. In a rebuttal that ran to more than 400 pages, Adani on Sunday rejected Hindenburg’s claims as baseless, questioned its motives, and likened the short seller to a “sea pirate”. But the timing of the report could not have been worse for the $2.4bn follow-on public offer the group’s flagship company Adani Enterprises was closing on Tuesday, which had been intended to broaden its investor base. For a while it looked as if Adani would pull it off. Abu Dhabi-based IHC committed to buy 16 per cent of the shares, and Adani enlisted fellow billionaires’ family offices to join the FPO, including Sunil Mittal, chief of Bharti Enterprises, and Sajjan Jindal of conglomerate JSW, who invested in the offering. Tranches allotted for retail investors and employees were undersubscribed, but other investors subscribed enough shares to allow it to proceed.

But at the same time, other investors were selling off Adani shares in spades, weighing down the entire index. Adani’s founder was having second thoughts about the FPO. The tycoon convened an afternoon “crisis” meeting to discuss options, according to a person familiar with the matter. Shortly after, on Wednesday evening he shocked India’s business community by calling off the share sale altogether. “For me the interest of my investors is paramount and everything is secondary,” Adani said in a video address. “Hence to insulate the investors from potential losses we have withdrawn the FPO,” he added, ending with the patriotic slogan Jai Hind (“Long live India”). Another person familiar with the matter said the sharp sell-off in Adani Enterprises’ shares had caught the billionaire off-guard. “He’s shaken,” the person says. “He doesn’t show it, but he’s shaken.” What next for Adani The question now is how much Adani’s proximity to Modi will protect him - and if it does, what that says about the systemic rigidity of India’s institutions today. Reaction within India has been muted. The government has said little. Sebi, the securities regulator, has made no public statement about the affair. “We never comment on any company specific matter?.?.?.?directly or indirectly,” Madhabi Puri Buch, its chair, told the FT in a text message on Thursday. At India’s executive level, a sense of omerta prevailed. Some leading CEOs contacted by the FT to share their views about Adani’s crisis declined, even under condition of anonymity. The Adani group’s ability to keep raising money and service its debt is an open question, say analysts who follow Adani and Indian business abroad. The group says it will have no difficulty meeting its debt obligations. Index provider MSCI last Saturday said it was “closely monitoring” Adani stocks and factors that might affect their eligibility for inclusion in its indices, any change in which could have an effect on their share prices.

Beyond the Adani affair, the outlook for India Inc is positive. Finance minister Nirmala Sitharaman presented a budget in parliament on Wednesday in which she described India’s fast-growing economy as a “bright star”, and announced plans to spend $122bn on capital expenditure in the coming year. But Adani will need to restore its investors’ confidence if it wishes to retain its position as a master builder in Modi’s India, and profit from some of this. All eyes will now be on the company’s, and market regulators’, further moves. Some have speculated that Adani could raise cash by selling one or more of its ports, power plants, or other assets.

Returning to the market for another share sale is probably not an option, say others. Investors are keeping a “hawk’s eye on Indian institutions that they should not bail out Adani?.?.?.?and private institutions will not want to put in money at this stage,” says Anurag Singh, managing partner at Ansid Capital in Chicago. “It’s a tough one to come out for the Indian group,” he adds. “I don’t know how they will come out of it.”