The Adani Group meltdown has reached the scale where investors and analysts are calculating the broader impact on the Indian financial system. And given the tight ties between Adani and the government of Prime Minister Narendra Modi, the doubts and questions rise to the top echelons of power.
Not just in India.
Jo Johnson, the younger brother of former British Prime Minister Boris Johnson, this week resigned as a board member of the India-focused investment bank Elara Capital, which has close ties to Adani. Johnson, a former British member of parliament and minister himself, joined the Elara board last June. Johnson hasn't had a lot of luck with his directorships -- he stood down at the world's largest crypto exchange, Binance, in December at the height of the "crypto winter."
Elara, based in London but focusing on fundraising for Indian companies, was one of the lead managers underwriting the Adani Enterprises (SE:ADANIENT) secondary stock sale, the largest in Indian history. No sooner had Adani said the offer made it over the line thanks to a little help from founder Gautam Adani's tycoon friends, as I explained on Wednesday, than it pulled the plug on said deal.
Gautam Adani took to YouTube to explain the decision to cancel the offering, conceding it "would have surprised many." The billionaire said the board had concluded that it would not have been "morally correct" to proceed with the deal given the recent "market volatility." The tycoon didn't mention that the "volatility" has been a rapid descent causing Adani Enterprises shares to plunge 54.8% in the last 10 days.
"For me, the interest of my investors is paramount, and everything else is secondary," Gautam Adani says, adding that it is important to "confess" that he owes all his success from his "humble journey" over four decades as an entrepreneur to their backing. So to "shield investors from potential losses we have withdrawn the FPO" follow-on public offer.
Adani Enterprises planned to use the proceeds of the secondary offering to retire debt and use the sale to expand its investor base. Despite the quashing of those aspirations, Gautam Adani says cancelling the offering "will not have any impact on our existing operations as well as our future plans."
The ratings agency Moody's begs to differ. "These adverse developments are likely to reduce the group's ability to raise capital to fund committed capex or refinance maturing debt over the next 1-2 years," it says.
Gautam Adani, who as I outlined on Wednesday is no longer the richest person in Asia, also didn't mention Hindenburg Research, the short-seller that lodged a bombshell report on the Adani Group last week. The Adani Group denies Hindenburg's claims, and has attempted to refute them in a 413-page response, but investors are demanding a little more digging into the events behind the stellar stock rise of flagship Adani Enterprises. Its shares ascended 3,040% between March 2020 and November 2022, something Hindenburg attributes to transactions involving offshore shell companies, many of them controlled by the tycoon's Dubai-based brother Vinod.
The Adani Enterprises secondary-offering shares had been offered on a buy-now-pay-later basis, with investors putting down 50% and paying the remainder over the next 18 months. But however rich they are, even India's billionaires were questioning the wisdom of such a scheme. Adani's shares, at 1,531 rupees today, are trading at less than half the price of the offer range of 3,112 to 3,276 rupees per share.
Elara has subsequently taken down its Web page featuring its directors, but if you want to see Johnson's mug on it, there's a cached version here. Johnson told The Guardian by email that he has been assured by Elara that it is "compliant with its legal obligations and in good standing with regulatory bodies," but that "I now recognise that this is a role that requires greater domain expertise in specialised areas of financial regulation than I anticipated and, accordingly, I have resigned from the board."
Hindenburg cites an interview with a former Elara trader as well as leaked emails as raising questions surrounding Elara's relationship with Adani. The trader told the short-seller that Elara has US$3 billion in concentrated holdings of Adani shares, and "it is obvious that Adani controls the shares," but with the funds structured to conceal that fact. Hindenburg also claims that the emails show that CEO of Elara worked on deals with a fugitive accountant who worked on stock manipulation with convicted stock-market scammer and former stockbroker Ketan Parekh.
Hindenburg says Elara operates the Mauritius-based India Opportunities Fund, which had a market value of US$3.04 billion as of December, with 98.8% of it invested in three Adani companies: electric utility Adani Transmission (NSE:ADANITRANS), natural-gas distributor Adani Total Gas (NSE:ATGL), and Adani Enterprises itself. Hindenburg claims the banking-secrecy laws in Mauritius allow the Adani family to conceal that they own that money, and are using the system to park it in the stock of their own companies, helping to inflate the shares.
Adani Group companies had a mixed performance Friday but have suffered a savaging since the Hindenburg report came out. Combined losses have exceeded US$100 billion in market cap, with Adani Enterprises down 2.2% Friday. Adani Transmission fell another 10.0%, its daily limit, taking its total losses to 44.6% since the Hindenburg bombshell. Adani Total Gas shares have lost 55.7%. In short: many of the companies are down by half.
The Adani Group runs ports and a host of utility businesses, which benefit from multiple government contracts. They've also attracted significant investment by Indian state-owned banks as well as state-owned life insurers, including the mammoth Life Insurance Corporation of India (NSE:LICI).
Both houses of parliament adjourned on Friday in chaos, as opposition lawmakers demanded an inquiry into the Adani affair, and the losses incurred through the government holdings. The Indian central bank, the Reserve Bank of India, has asked Indian banks to clarify the extent of their exposure to the group, Reuters reports.
Lawmakers forced the suspension of parliament by shouting slogans such as "Stop looting the poor!" and demanding an investigation. Compounding the pain, S&P Dow Jones Indices said it would drop Adani Enterprises from its sustainability indexes, effective February 7, "following a media and stakeholder analysis triggered by allegations of accounting fraud." That will force investors who use those indexes to build ESG-focused funds to drop holdings in the company.
Indian stocks have been some of the world's best-performing major markets in recent years, with the Sensex up 120.5% from the height of Covid's impact in April 2020. But as the Adani inquest continues, investors need to first watch for any fallout on the Indian banking sector, and then the Indian economy. As of now, the questions raised by Hindenburg have been confined to the Adani Group, but watch this space.