Last September, Indian billionaire Gautam Adani surpassed French luxury goods magnate and LVMH founder Bernard Arnault to become the second-richest man in the world. A school dropout whose firms own no disruptive proprietary technology, he had amassed a net worth of US$147 billion ($195 billion).
Adani, 60, had catapulted from being an operator of ports, airports, mining, cement and power to running one of the world’s fastest-growing business conglomerates. Over the past five months, US$88 billion has been wiped out from his net worth. Adani-controlled listed firms had more than US$120 billion shaved off their total market value.
Here is what is going on: Adani Group — which Fitch Ratings describes as “deeply overleveraged” — had seen shares in its listed companies soar eightfold from the start of the pandemic in March 2020 to the end of last year. Flagship Adani Enterprises saw its stock soar 29-fold. Other Adani entities also saw spectacular gains. Utility firm Adani Power was up ninefold in the same period; solar energy play Adani Green Energy was up 12-fold; ports operator Adani Ports and Special Economic Zone soared ninefold; and power supplier Adani Transmission about 11-fold. Founder Adani had added US$100 billion to his net worth in three years.
As the poster child for using private capital to boost infrastructure and domestic manufacturing, Adani has been a key driver of the Indian bourse since 2020 — one of the best-performing markets in Asia over the past decade. Between 2013 and 2022, the benchmark MSCI India Index had an average annual return of 7.6%, far ahead of 2.6% for the MSCI China Index and just 0.3% for the MSCI Asean Index. Last year, India overtook the UK and France to become the world’s fifth-largest stock market behind the US, China, Japan and Hong Kong. It has since fallen back to seventh place.
On Jan 25, New York-based short seller Hindenburg Research in a scathing report alleged that Adani Group had engaged in a “brazen” stock manipulation and accounting fraud scheme over decades. Calling it “the largest con in corporate history,” it noted that Adani firms had taken on substantial debt, including pledging shares of their inflated stock for loans, putting the entire group on precarious financial footing.
Using his overvalued stocks as currency, Adani went on a shopping binge paying US$6.4 billion to Swiss cement giant Holcim Group to buy Ambuja Cements and its subsidiary ACC in September. Ambuja’s shares are down 36% since the deal closed. Hindenburg also alleged improper use of offshore tax havens like Mauritius, a favourite of wealthy Indians. “Adani Group has previously been the focus of four major government fraud investigations, which have alleged money laundering, theft of taxpayer funds and corruption, totalling an estimated US$17 billion,” the report noted. “Adani family members allegedly cooperated to create offshore shell entities in tax havens like Mauritius, the United Arab Emirates and the Caribbean Islands, generating forged import and export documentation in an apparent effort to generate fake or illegitimate turnover and to siphon money from the listed companies.”
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The report could not have come at a worse time. Adani group was raising US$2.4 billion through a follow-on offering to pare its burgeoning debt load. Investors did not like what they saw in the Hindenburg report and ran for the exit. Adani Enterprises’ stock fell below the offering price.
On Feb 1, the group was forced to cancel the share sale in a dramatic reversal after claiming the offer had been fully subscribed. The U-turn came amidst allegations the Adani-linked offshore entities may have subscribed to the share sale. For his part, Adani said its board “felt that going ahead with the issue would not be morally correct.”
Crony capitalism
Indian crony capitalism is the key to understanding Adani. In his new book India is Broken, Princeton University economist Ashok Mody notes that the rise of Adani is deeply connected not just with the rise of the Indian stock market but with Prime Minister Narendra Modi’s vision as well as the Gujarat connection. Modi and Adani hail from Gujarat, where they developed a deep personal relationship while Modi was chief minister. “Adani is a leading business partner of Modi,” says Geoff Law, coordinator of Adani Watch, an environmental website. Adani’s rise and recent woes are “an example of what happens when crony capitalism and regime favouritism create a perceived culture of impunity,” Law notes. Modi frequently travelled on Adani’s private jet.
As Adani drives “national infrastructure development,” says Columbia University professor Adam Tooze, the billionaire “personifies the oligarchic linkages and rentier profits generated by the licensing system for infrastructure on which Modi’s growth model has heavily relied”. The key to the model is aggressive risk-taking “national champions,” adds economist Mihir Sharma. “If Adani didn’t exist, the Indian Government would have had to invent him,” he wrote in a recent opinion piece. “India has enjoyed a pass largely on the fact that it’s not as bad as Russia or China. The world needs to wake up to the plight of Indian democracy, and governance before it’s too late,” says Law.
Adani Group’s business model is vertical integration to extract maximum value through the entire supply chain. It owns coal mines in Australia and Indonesia, coal terminals in both countries and ships that bring that coal to Indian ports that it owns, as well as power plants that use coal. Last year, coal-related revenues accounted for 60% of group sales. Adani pledged to grow 100 million trees by 2030 and touted solar-cap investments to deflect criticism of his reliance on dirty, sooty, toxic coal.
Infrastructure projects such as ports, airports and power plants are capital-intensive and have a long gestation period, where the payoff can be 20 to 30 years. Investors used to a low-interest rate environment who were betting that global rates would remain lower for longer are waking up to realise that the world has changed, and rates are likely to stay higher for longer. That has changed the economics for infrastructure projects and high-flying, fast-growing groups such as Adani, who have long been fascinated with debt.
The key is whether Adani firms can generate enough cash to keep paying the group’s growing interest expense. The problem is that Adani’s interest expense will continue to rise as its existing debt is rolled over at higher rates. Until now, Adani had easy access to equity markets, where it could sell down stakes in its firms to pay debts. Adani’s total group debt of US$30.5 billion requires interest payments of over US$2 billion yearly. US$ 2.2 billion of debts is due to be rolled over this year at higher rates. For a group with growing working capital needs and restricted access to global capital markets because of its recent reputational issues, Adani Group needs massive streams of free cash flow just to keep the vultures at bay.
State banks have huge exposure
But Adani will not be allowed to fail — not just because Modi is his benefactor but because of the systemic risk. India’s state-owned banks have massive exposure to Adani firms. Hong Kong-based brokerage CLSA notes that India’s public sector banks hold 30% of Adani Group’s total debt, and private Indian lenders hold less than 10%. Indian public sector banks had lent US$9.9 billion to five listed Adani group firms as at March last year. Indian banks have been grappling with problem loans for years.
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The overall “bad loan” ratio, which measures the extent of default on loan repayment, was 5.9% as of March 2022 — the highest among large developing economies. State-controlled banks have been remarkably eager to loan money to Modi’s cronies or one of his many pet projects, disregarding their creditworthiness. They have dragged their feet on recapitalisation. The last thing they need now is a sudden deterioration in their balance sheets or an outright default from politically well-connected groups such as Adani.
State-owned Life Insurance Corp (LIC), which has US$510 billion under management, is another major Adani backer. LIC invested US$3.67 billion in listed Adani firms, which had grown to US$6.87 billion the day Hindenburg published its report. At the height late last year, more than 9% of LIC’s total assets were Adani-related stocks. Analysts believe LIC may have lost half of its total Adani holdings over the past 12 days, or around US$3.4 billion. How? LIC has a 4.6% stake in flagship Adani Enterprises, whose shares are down 54%. It had a 9.6% stake in Adani Ports, whose shares are down 39% over the two weeks. Adani Power stock is down 33%, Adani Transmission is down 50%, Adani Total Gas is down 58%, and Adani Green is down 52% since Jan. 25.
Foreign banks with mostly US dollar-denominated loans or dollar bonds account for much of Adani group debt. Other lenders include private equity firms like Apollo Global Management which loaned US$750 million to Mumbai Airport. Adani’s top bondholders include Middle Eastern sovereign wealth funds trying to recycle petrodollars.
Another reason Adani will not be allowed to collapse is India’s dream of rebuilding its creaky, dilapidated infrastructure — ports, airports, power plants, power transmission, pipelines and toll roads depend on the group, the country’s largest build-operate-transfer operator. No other group has the experience, political connections, and, until recently, access to financial markets to execute large projects.
Modi’s opponents have a field day before next year’s parliamentary elections. “Action is being taken against Adani worldwide, but PM Modi is quiet,” the opposition Congress party tweeted. “When will our government take action?” The party is organising nationwide protests to publicise the scandal.
Adani Group says allegations of stock manipulation have “no basis” and stem from an ignorance of Indian law. Adani claims have always made the necessary regulatory disclosures. Indeed, Adani wrapped himself in the Indian flag and portrayed Hindenburg as a foreigner trying to destroy India Inc. The short seller’s allegations were a “calculated attack on India, the independence, integrity and quality of institutions, the growth story and ambition of India,” Adani Group said in its response. Hindenburg described the group’s response as “bloated” and claimed it “ignores every key allegation” it had raised.
The markets will decide Adani’s fate in the coming months. The weightage of listed Adani firms in global indices is now under review. An average eightfold price increase in Adani stocks had helped the group’s firms gain 5.75% weightage on the MSCI Indian Standard Index. If that weightage is cut or Adani firms are dropped from the index, it would force more foreign investors to flee the group’s stocks. The fair value of Adani Enterprises shares is INR945 ($15) says New York University’s ‘valuation guru’ Aswath Damodaran. That implies a further 37% downside.
It is unclear whether the contagion will spread and what else it might engulf, but the Adani saga has already undermined investor confidence in India. So, who is to blame for ignoring the red flags? Journalists and analysts sang praises and became enablers by helping Adani pump up its overhyped story and stocks. For another, Indian regulators, with their hands-off approach, were asleep at the wheel as Adani stocks soared eightfold while retail investors were left holding the bag.
Towards the end, Adani had begun to believe in his own slick PR. It was pure hubris. Global investors don’t have to be overweight in India anymore. Indeed, they can do without the exposure to overhyped Adani stocks. With the reopening of China and growing global interest in Indonesia and Vietnam, investors have other options.
Assif Shameen is a technology and business writer based in North America
