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Published on: Feb. 14, 2023, 2:16 p.m.
L’affaire Adani spooks markets
  • Adani has used debt aggressively to build his assets

By Daksesh Parikh. Executive Editor, Business India

It took just one research report from a little-known US-based research outfit, Hindenburg Research, claiming to be a forensic financial research outfit to put the spotlight on the operations of one of India’s largest conglomerates, the Adani Group. Without going into the merits or otherwise of the report, the markets were clearly spooked and went on a selling spree post the release of the report. The release of the report on 24 January, widely reported on television news channels reflected instantaneously in the share prices which went into a downward spiral.

The shares of Adani Enterprises, the Group’s flagship company which were ruling at Rs3,443 lost nearly 50 per cent in the next 7 sessions to close at Rs1,584. The intraday level on 3 February reached a 52-week low at Rs1,017. Other shares also shed ground and in the first 3 days subsequent to the release of the report, the market value of the Adani companies was down by $70 billion.

The report raised concerns over the group’s corporate governance and its opacity in operations of the offshore companies in allegedly managing the share prices of the companies, alleged irregularities in the accounts, besides stating that several of the companies were overleveraged. Several other issues were raised, besides these. 

It stated that: “Even if you ignore the findings of our investigation and take the financials of Adani Group at face value, its 7 key listed companies have 85 per cent downside purely on a fundamental basis owing to sky-high valuations.” The report claimed the findings were based on two years of research and also a caveat that Hindenburg is a short seller in Adani companies shares. 

 A small fortune for Anderson

Hindenburg did not disclose how many shares of Adani were shorted and the means adopted to short the shares apart from stating in the report that they had taken a short position in Adani Group companies through US-traded bonds and non-Indian-traded derivative instruments. It is not known whether the research was done only for the firm. Be that as it may, it was evident that the owner, Nate Anderson CFA, CAIA, made a small fortune, just as he has done by releasing reports on several other overseas companies over the last 6 years.  

Adani rebutted the findings immediately. In a Twitter post on 25 January the Adani Group said the report is “a malicious combination of selective misinformation and stale, baseless and discredited allegations that have been tested and rejected by India’s highest courts”. This was followed by a detailed note to the BSE signed by the Group CFO, Jugeshinder Singh.

The report reiterated that the group has “always been in compliance with all laws, regardless of jurisdiction, and maintains the highest levels of corporate governance.” They questioned the timing of the post which was released just a day before the Rs20,000 crore follow-up Adani Enterprises issue. 

The issue offered the shares in the price band of Rs3,112-3,276 which was a discount of 8-13 per cent over the previous day’s price. The issue was open for subscription from 27-31 January. Bidding for anchor investors was started from 25 January. Despite the ruckus created by the report, anchor investors committed nearly Rs6,000 crore to the FPO with half of it being paid upfront with the application. The roster of anchor investors included Abu Dhabi Investment Authority, LIC, various entities of HDFC, Dovetail Capital, SBI, Goldman Sachs, Morgan Stanley, Nomura, Citibank, BNP Paribas, Société Générale and ELM Park.

  • From a coal trader, AEL now owns mines

Even as the anchor investors showed their trust and reposed confidence in Adani, selling across Adani shares continued unabated. On 27 January AEL shares on the BSE dipped sharply from Rs3,390 to Rs2,760 raising fears of a possible scuttling of the issue or a sharp dip in prices. Gautam Adani remained undeterred and went on to exclaim the issue would not see any change in the price at which the shares were offered.

On 26 January a presentation of the Group stated that the promoters had deleveraged their own holdings, eight of the listed companies were audited by the top 4 auditors in the business and also all its companies’ borrowing programmes had been rated with a better than average rating.

AEL, the incubator of the group, has more than 27 different auditors working for various companies, which include a mix of ‘the big 6’ and other respected auditors. Airport assets are housed in AEL and the biggest, MIAL is audited by Grant Thornton.

Besides an attempt to thwart India’s largest IPO, the Hindenburg report was, according to some, seen as indirectly trying to scuttle India’s growth story. Many felt it was an attack not just on Adani but an attack on India’s growing prowess in the global market. Nevertheless, the selling in the market continued unabated. The value of shares traded of AEL, went up 14x in the three subsequent sessions, on 27, 29 and 30 January. This was despite the fall in the share price. 

The ‘national threat’ theory spread like wildfire on various WhatsApp groups. Several WhatsApp groups also aired their own theories on the timing of the report. While retail investors shunned the issue, preferring to pick up shares at a cheaper rate from the market, several large industrialists lent their support to the issue through investments from their private home offices. While the actual names are not publicly known, these are purported to include Mukesh Ambani, Sajjan Jindal, Sunil Mittal and more. The biggest FPO did manage to sail through by 31 January, 2023. 

On the day of the budget, 1 February, however, the shares of AEL dipped below Rs2,000 for the first time and saw the Board of Adani Enterprises making an announcement of the withdrawal of the fully subscribed issue. On 2 February, the shares dipped even further and made an intraday low of Rs1,017.  

 Adani is a work in progress

Hindenburg has largely based its concerns on pricing based on high p/es. While on the face of it the p/e of his companies do seem to be on the higher side, what cannot be captured is the potential of the group’s future revenue generating assets. From a coal trader, AEL has been reinventing itself over and over again. It is now one of India’s largest groups in the infrastructure segment.

AEL houses airport assets, data centres, roads and new industries. Institutions are taking bets not so much on the present and the immediate present but on a long-term basis where it sees the assets yielding non-linear returns. The lower share prices will give them yet another compelling reason to expand their portfolio. Underlying businesses do not depend on the sway in the share prices. 

  • Adani Green Energy is a leading alternative energy player in the country

Adani, like several other companies, has used debt aggressively to build his assets. The leverage, as such, does not really perturb Gautam Adani too much. He has gone on record saying he has taken loans which have been used for creating long gestation income creating assets. In an article done by Business India, Adani@50 (8 July 2012) Gautam Adani who was at the time involved in his Australian coal mine project, replied to a query about whether the huge debt of this project could put his group at risk. Adani said: “Debt in any infrastructure project is a given. When you are moving fast you need to have access to more and more funds. One should not worry, as long as the project parameters are sound… Do not get tense over the debts and servicing. The assets will pay for themselves.”

Adani, unlike Ambani, relied heavily on raising debt for funding his projects. Dhirubhai Ambani, the founder of Reliance Industries, used to approach the capital markets for raising funds as and when new projects were envisaged. Initial funds, even those raised through non-convertible debentures, were later converted into equity.  One can argue that the times were different and unlike industrial projects in petrochemicals, the gestation period in the case of infrastructure projects is much longer.

The issue was big enough for parliamentarians to raise it in the Lok Sabha. On 3 February, at the time of closing Business India’s current issue, there were 14 political parties, all in the opposition, which were planning to press for the setting up of a joint parliamentary committee or alternatively, entrust the same to a judicial committee. The coming fortnight is expected to see a lot of action. Adani is by no means going to roll over and play dead. There have been several instances where short sellers have tried to disrupt established businesses earlier also. 

Adani has faced many crises in the past and hopefully he will be able to come out of this one too.

  • Adani, unlike Ambani, relied heavily on raising debt for funding his projects. Dhirubhai Ambani, the founder of Reliance Industries, used to approach the capital markets for raising funds as and when new projects were envisaged

How Ambani handled the short sellers

Short selling is nothing new in Indian markets. Earlier when the stock markets were lightly regulated (in the 80s and 90s) large industrial houses had to continuously face concerted bear attacks. The badla system facilitated short selling and allowed trades to be carried forward from settlement to settlement, despite being a cash market and a ban on future trading.

Dhirubhai Ambani, at one point in the early 80s, faced a strong selling onslaught led by short sellers, led by Manu Manek, one of the shrewdest operators, of his time, in the open cry system ring. He, along with a few brokers, sold shares of Reliance in the markets in a bid to depress prices further. This was immediately after one of the several capital issues which Reliance Industries had made to raise funds from investors. Seeing the velocity of the bear attack a group of brokers, created in the aftermath of the raid, went on an aggressive buying spree and bought back a large chunk of the nearly one million shares sold.

With source of funds at their disposal the buyers demanded delivery of shares during the end of the fortnightly settlement. This was one of the rare occasions when, instead of the sellers getting payment, badla charges, they had to fork out payment to the buyers, albeit a small amount. In the aftermath the sellers chose to square off their position in the new settlement by buying at a higher price, thereby incurring more loss. Such was the chaos that the market had to be kept closed for a few days. 

Of course, the market at that time was small, volumes were limited as were the number of brokers. FIIs had not made an entry as yet. There was just one more time that short sellers troubled Ambanis in the early days. All this was before SEBI was formed.


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