The Gautam Adani-led Adani Group, who’s stocks were one of the key drivers of stock markets since the past 3 years, is now finding it hard to even stay in the positive zone. And, all of it happened in just 1 week.
In other words, a major part of his over $100 billion earnings in the last 3 years was wiped out in the last week.
The fall has been so massive that the group’s market losses have now swelled to over $100 billion, sparking worries about their potential systemic impact.
The market rout started January 25, after a US short-seller Hindenburg Research published a report alleging stock manipulation by the Adani Group and raised concerns about high debt and valuations.
What was the report about
Hindenburg released its report 2 days before Adani Enterprises’ Rs 20,000 crore FPO was about to open. The company had already raised Rs 5,985 crore by allotting shares to anchor investors.
In the report, Hindenburg accused Adani Group of a “brazen stock manipulation and accounting fraud scheme.” It cited 2 years of research, including talks with former senior executives of the company and reviews of several documents.
The report comprised 32,000 words and alleged various kinds of frauds and account manipulations by Adani Group companies over the years. It said that key listed Adani companies have taken on substantial debt, including pledging shares of their inflated stocks for loans, putting the entire group on precarious financial footing.
It also said that seven Adani listed companies have an 85% downside on a fundamental basis due to what it called “sky-high valuations”.
Further, the report highlighted accounting irregularities and sketchy dealings enabled by virtually non-existent financial controls. “Adani Enterprises has had 5 chief financial officers over the course of 8 years, a key red flag indicating potential accounting issues,” it said.
Citing evidence of stock manipulation, Hindenburg gave reference to Sebi’s investigation and prosecution of more than 70 listed entities and individuals over the years, including Adani promoters, for pumping Adani Enterprises’ stock.
Hindenburg also has short positions in Adani companies through US-traded bonds and non-Indian-traded derivative instruments.
Adani denied allegations
Caught in the corporate-cum-stock market storm, Adani Group issued a statement on January 29 against Hindenburg’s allegations few days later and likened the damning allegations to a “calculated attack” on India, its institutions and growth story.
Stating that all accusations were nothing but a lie, the group said that 68 of the 88 questions posed by Hindenburg were already addressed by it through annual reports of various group companies, offer documents and stock market disclosures.
Of the remaining 20 questions, 16 were relating to public shareholders and their sources of funds, while the rest four were baseless allegations, it added.
“The report is rife with conflict of interest and intended only to create a false market in securities,” Adani Group claimed.
It also highlighted that mala fide intentions were apparent given the timing of the report when Adani Enterprises was about to undertake the largest equity FPO.
“Needless to say that Hindenburg has created these questions to divert the attention of its target audience while managing its short trades to benefit at the cost of investors,” they added.
In addition, the group said that at various points in the report, it was clear that Hindenburg Research didn’t have a good understanding of the Indian legal system, the accounting practices and how the fund-raising processes work in the Indian capital market.
As an example, it said that Hindenburg Research had falsely claimed that Emerging Market Investment DMCC gave a loan of $1 billion to Mahan Energen.
In reality, “Emerging Market acquired the $1-billion ‘unsustainable debt’ of Mahan Energen from its lenders for $100 as part of a resolution plan duly approved by the National Company Law Tribunal (NCLT) under the Indian Bankruptcy Code. These are mala fide attempts to question bona fide transactions,” the rebuttal noted.
Hindenburg’s counter statement
In response to Adani’s rebuttal, Hindenburg on January 30, dismissed charges that its report was a “calculated attack on India”.
In its defence, the US short seller said that fraud cannot be obfuscated by nationalism or a bloated response that ignored key allegations.
Standing by its report that alleged “fraud” at the second largest conglomerate in India run by the world’s then-third richest man, Hindenburg said it disagrees with Adani group’s assertion of its report being an attack on India.
“To be clear, we believe India is a vibrant democracy and an emerging superpower with an exciting future,” it said.
“We also believe India’s future is being held back by the Adani Group, which has draped itself in the Indian flag while systematically looting the nation.”
A “fraud is fraud, even when it’s perpetrated by one of the wealthiest individuals in the world,” it said, adding, “Adani also claimed we have committed a ‘flagrant breach of applicable securities and foreign exchange laws’. Despite Adani’s failure to identify any such laws, this is another serious accusation that we categorically deny.”
Hindenburg said it “found Adani’s lack of direct and transparent answers” on the allegations of use of offshore entities “telling”.
Market rout continues
On January 24, the day Hindenburg released this report, a share of Adani Enterprise costed Rs 3,442.75 at close of day’s trade. Today, the stock is priced at Rs 1,564.70, that is, a fall of 54.55% in just 6 sessions.
On Thursday as well, the stock tanked 26.5%. Most of the other group firms also declined.
If we look at Adani Ports, the stock has declined 39%, Adani Power 26.43%, Adani Transmission 43.49%, Adani Green Energy 45.75%, Adani Total Gas 56%, and Adani Wilmar fell by 26.46%.
Cumulatively, in 6 days, stocks have faced an combined erosion of over Rs 8.76 lakh crore.
Global rankings fall
As a result of this massive drag in stock prices of companies, Gautam Adani’s position in Forbes real-time global richest ranking has slipped to 17.
Adani has now lost his tag as richest Asian person. His wealth now stands at $64.2 billion.
However, according to Bloomberg Billionaires Index, Adani is placed at 13th position with a total wealth of $72.1 billion.
In September last year, Adani’s wealth had surged to over $155 billion, making him the 2nd richest person in global billionaires ranking and the first Indian (and Asian) to break into the top 3 list.
In a little over two and half years, Gautam Adani’s wealth had galloped over 13 times. In January 2020 just before the onset of Covid pandemic, his net worth was about $10 billion.
Adani withdraws FPO
Seeing the beating Adani group companies suffered on the bourses since last week, the Board of Directors of the group decided to call fully subscribed FPO of Adani Enterprises.
In a regulatory statement to the bourses, Adani Group said that it has decided not to proceed with FPO in the interest of its subscribers.
“Given the unprecedented situation and the current market volatility the company aims to protect the interest of its investing community by returning the FPO proceeds and withdraws the completed transaction,” Adani Group said in its official release.
The Rs 20,000 crore worth FPO was fully subscribed just a day ago as investors pumped funds into the flagship firm.
However, the flagship company of the Adani Group had a lacklustre start to its FPO, with only a 1% subscription on the first day of the share sale. The offer was opened for public subscription from January 27-31.
But, it managed to get investors on the last day of the share close on Tuesday.
Total bids for 5.1 crore shares were received, against the offer size of 4.6 crore shares, on January 31, the third and final day of retail bidding, representing a 112% subscription. This excludes the Rs 5,985-crore anchor book, a part of the QIB portion, that was completely subscribed a day before the FPO had opened on January 28.
Adani Group said that it will return money to investors and thanked them for their support and commitment towards the group.
The fundraising was critical for Adani, not just because it was seen as a move to cut his group’s debt, but also because it is was being seen by some as a gauge of confidence at a time when the tycoon faces one of his biggest business and reputational challenges.
RBI, Sebi start scrutiny
The Securities and Exchange Board of India (Sebi) has started examining the constant crash in shares of Adani Group.
It is also looking into any possible irregularities in a share sale by its flagship company, a Reuters report said.
Sebi is undertaking a full-scale examination of the fall in shares, a source told Reuters, declining to be identified as the matter is confidential.
Meanwhile, Reserve Bank of India (RBI) has also sought details about lenders’ exposures to the Adani Group.
Country’s largest lender SBI had said it’s exposure to Adani group is fully secured by cash generating assets, in an attempt to assuage investor concerns.
Another public sector lender Bank of Baroda has said its total exposure to the embattled group stood at Rs 7,000 crore, which are also fully secured.
Government-owned life insurance behemoth Life Insurance Corporation (LIC) has disclosed of having an exposure of Rs 36,474.78 crore to Adani group’s debt and equity, and added that the amount is less than one per cent of its total investments.
Share of mutual funds in Adani
Mutual funds from India and elsewhere hold just 3.4% of Adani Enterprises, 2.8% of Adani Total Gas and 3.6% of Adani Green Energy. Promoters of the companies hold most of the shares.
Adani Enterprises and Adani Port are constituents of the Nifty 50, so they are automatically in portfolios of some exchange-traded funds (ETFs) and index funds. But active funds have very little exposure to Adani stocks and are largely unscathed by their fall.
US-listed iShares MSCI India ETF , which at the end of December had a combined holding of $172 million in Adani Transmission, Adani Total Gas and Adani Enterprises, has lost 2.7% over the past week.
Among active funds, the Kotak Balanced Advantage fund , which has positions in Adani Enterprises and Adani Ports and Special Economic Zone, has shed just 0.5%.
Exposure to debts
According to analysts quoted by Reuters, the shock to the system comes because of Adani’s heft and influence, rather than exposure.
His conglomerate spans ports, coal mines, food businesses, airports and lately media, and before the rout its seven companies had accounted for more than 6% of the National Stock Exchange market value.
While the Adani Group has total gross debt of Rs 2.2 lakh crore ($26.86 billion), top banks have said their credit exposures to the group are small, as per a Reuters report. Shares of the firm are closely held, mutual funds have low exposure too.
“Everybody’s keeping a very close eye on those debts,” Pankaj Pathak, a fund manager at Quantum Asset Management told Reuters. “But on the domestic debt side, we hardly see any impact on the broader corporate bond market because of what is happening in Adani,” he said, pointing to the limited ownership of those bonds.
Citigroup, Credit Suisse worry
As regulators step in, banks are distancing themselves, with Citigroup’s wealth unit saying it has stopped extending margin loans to its clients against Adani securities, and Bloomberg News reporting that Credit Suisse had done likewise.
Investment research firm TS Lombard said the Adani allegations had “hastened the decline we expected in Indian equities as foreign investors rebalance their portfolios on China’s reopening” but that the declines would be limited for several reasons, including Adani being “too unique to fail”.
(With inputs from agencies)
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