Had it been only Adani’s money, nobody would have cared. But in this fiasco, the common public is also a stakeholder , which makes the rise and fall of Adani Enterprises very important. Two major public sector investors in Adani enterprises are the SBI and the LIC. SBI has given loans worth 21 thousand crores to Adani enterprises and LIC has invested 30 thousand crores in the Adani Group of Companies.
And the biggest question is who has put public money up for sale?
In economics, capital markets are considered the nerve centres of economic growth, simply because they reflect the circulation and distribution of private investment in the market. After government expenditures, it is the private investment that drives the bulk of economic growth by creating jobs and manufacturing essential commodities. If there is private capital in the market then the government can focus on building essential public utilities like hospitals, universities, public transport etc. and ensure there is enough money left in the government treasury to pursue social service schemes for public welfare. Stock or share market is a type of capital market, where buying and selling of shares of all listed companies take place, including Gautam Adani’s, Adani Enterprises. This essay will briefly explore why the Adani empire is falling after Hindenburg’s research report and what it means for the common public.
The Hindenburg saga Private companies invest in the market to ensure that they earn profits. That is the bottom line of any business and true for any big or small business. The important point while earning a profit is that it should be done legally and ethically. Then one might ask, why are we discussing Adani Enterprises, it is also a legally registered company in India. The answer, to a great extent, lies in the recent findings of Hindenburg’s two-year investigative report on Adani Enterprises. Because of this report, the Indian parliament’s both houses were adjourned for many days and the Securities Exchange Board of India (SEBI), the capital market regulating authority of India, ordered an inquiry into Adani Enterprises. The report levels serious allegations on Adani Enterprises and says that over the years, it has engaged in illegal practices like stock/share price inflation, accounting manipulation, and malpractices in corporate governance.
Doing business in India Let me explain it with the help of a housing loan example: if you go to the bank for a housing loan, they will ask you for your property documents. Once the bank checks the documents, it then evaluates and compares the loan amount you have asked for with the market value of the property. This is done because banks want to ensure that the loan amount that they are giving is backed by a credible market value of the property which customers keep as a mortgage with banks. Similarly, companies are like houses that borrow loans from banks and other financial institutions, but with two differences: Firstly, the company creates its shares and sells them to the general public, which is perfectly legal as long as the price of shares is backed by that much amount of company assets. Secondly, banks do a proper check before giving housing loans but common public investors, generally, do not do a proper check before investing. Suppose you bought one share of 1 lakh rupees of a company, that company should have assets of equal amount, just in case, if the company goes bankrupt any day, you will get your money back, if and only, assets of an equal amount are left with it. This is the legal way of doing business in India.
What does the report say? However, the Hindenburg report argues that Adani companies have deliberately increased the price of shares while not being backed up by the same amount of assets. This, the report argues, has been done arbitrarily which is a violation of business and market rules. Adani Group of Companies share prices in the last two years have exponentially increased by 800 per cent, while the entire stock market has grown by only 50 per cent. This begs the important question from a regulatory perspective: how did SEBI not notice this sudden rise, or did it turn a blind eye? Earning profits is not illegal but outdoing the market, particularly in Covid times, by 820 per cent margin should have raised red flags for the regulators. When Covid disrupted the entire global market, many big Indian businesses earned profits but were at par with the cumulative growth of the stock market, except Adani enterprises. Every government has a certain level of threshold, which in economic policy is called upper control limit and lower control limit i.e. regulatory review will be triggered if the market falls below an acceptable level and/or grows exponentially beyond an upper market level. SEBI should have been alerted because Adani share prices grew at an unimaginable speed in a very short time. . The need for review arises to ensure that companies operate within the limits set by SEBI.
Why Adani? Because almost 70 % of its money is borrowed from loans and advances by banks and other financial institutions, the rise and fall of Adani will affect others as well. In 2014, Adani Enterprises’ net wealth was 1.9 billion dollars and by the end of 2022, it jumped to 26 billion dollars, a staggering increase of 230%. From 24th January till the writing of this column, Adani Enterprises has lost more than 112 billion dollars and its impact on others is visible in the market. Its share price before 24 January was more than 4000 rupees and at the moment is tumbling around 1600 rupees, falling each day. Such an unchecked rise and fall raises serious questions over the functioning of SEBI. The Indian law allows family businesses to control 75% of company shares while 25% is to be floated in the market for the general public. Adani Enterprises directly controls 73% of its shares but the second allegation of the Hindenburg report is that Adani Enterprises controls 97% of its total shares, which is illegal. The report says, bogus companies in Mauritius and Cayman Islands, which have no public records, are owned by Gautam Adani’s brothers and they invest millions of dollars in Adani enterprises and thereby control the ownership of the company. These companies just invest in Adani Enterprises and then hold their shares and do not sell them. This is called round-tripping in corporate finance. Generally, if you own the shares in any company, you have the right to choose its board of directors and also can veto any decision because a shareholder is also considered to be one of the many owners of the company. To avoid this, companies illegally try to manipulate the shareholding control by ensuring most of the shares are owned by people related to a company (unofficially) and very less is available to the general public. And this is not permitted under Indian business laws. The detailed allegation is that the Mauritius-based companies have the same address and share the same office on papers, and are alleged to be owned by people related to Adani. If the allegation that they have invested money into Adani Enterprises due to which the company’s equity has improved and the share price shot up turns out to be true, it will be a case of money laundering. It could very well be that black money is being funnelled into India and turned white by investing in the Adani Group of Companies. This will raise serious questions about the government’s commitment to tackle black money.
More damning allegations Following from the second allegation is that Adani companies are highly overleveraged. Simply put, the amount of money they have borrowed as loans is very high compared to their own money. Again, this is not illegal but the rules in economics are that markets are uncertain while the more is better. These two rules loom large in economic markets. Then such an allegation at its face value is very genuine. All the economic experts are then asking one common question: if the Adani Group is so overleveraged, how can its share prices grow so fast? One thing to remember is that most Adani Group projects are into infrastructure and for a long period of time, which means they will not generate profits in their initial years. If profits are not generated, then on what basis have share prices gone up? The report says the share prices have been deliberately manipulated, over and above their real values, which makes it a case of accounting fraud. Without taking the Hindenburg report into consideration, and assuming that Adani Enterprises grows at 30% every year, experts have calculated its share price to be between 1100-1400 rupees per share, which according to almost all experts appears reasonable when looking at how the entire capital market is growing. But Adani shares before the Hindenburg report came and stood at 4000 rupees per share on 24th January.
Now readers might ask if prices have fallen so sharply, why are not public investors protesting against this? Surely they must have lost too much money due to such a fall. The answer to that lies in the shareholding control of the company, discussed above. Almost 97% of shares are held by people or parties related to the Adani group, so why would they protest against the fall in share prices of their own companies? If they do so, all major investors will stop giving them further loans because the stock market is driven by sentiments. This effectively means that the Adani share price might tank but it will not be bankrupt like the Sahara Group. But here the important question is: when a company is doing most of its business on borrowed money, can it be allowed by market regulators (SEBI) to arbitrarily skyrocket its share price, that too when a company has grown so big that it represents 1% of India’s GDP? The impact of such a rise and fall was visible when Adani group cancelled its 20,000 crores Follow-on Public Offer (FPO) and bonds issue by saying it was not morally correct to proceed when market sentiment was changing because prices were falling. Put simply, if a company wants to raise money for future obligations, it does so by putting a certain quantum of shares for sale in the market, called FPO.
Experts believe that it was cancelled because the Adani Group received margin calls from investors. Now recall the house loan example I gave initially, and assume that the house, which you kept as a mortgage with the bank for a loan – its price has dropped in the market. Now, the bank will make a call to you saying that since your house price has dropped below the loan amount that we gave you, you have to keep something more as a mortgage to complete the margin that has arisen or you will have to prepay the loan amount. This is called a margin call. When the FPO began, the share price was fixed between 100-3300 rupees and investors had started to buy but after the Hindenburg report came, share prices dropped to 1400 rupees, so naturally, as an investor, if you had bought shares for crores of rupees at 3300 rupees per share whose current price is 1400 rupees, you will make a margin call to the company and reclaim the additional amount that you had paid. Because Adani enterprises did not have such a huge amount to pay back to the investors, it cancelled the FPO.
How it affects the common public Had it been only Adani’s money, nobody would have cared. But in this fiasco, the common public is also a stakeholder , which makes the rise and fall of Adani Enterprises very important. Two major public sector investors in Adani enterprises are the SBI and the LIC. SBI has given loans worth 21 thousand crores to Adani enterprises and LIC has invested 30 thousand crores in the Adani Group of Companies. Should it worry you? Yes, because the money that lies with SBI and LIC is the money of the general public, which they deposit to meet their future needs. When the Adani share price declined sharply, SBI and LIC share prices dropped by 4% as well, which means if Adani Enterprises continues to collapse, public money will also vanish. The question is, why are these public sector companies putting money into Adani group when it is highly overleveraged and yet not generating profits, while most of the well-known private mutual fund companies and banks are staying away from such an investment? If the Adani saga has anything to offer, it is that stock markets are like an osmotic membrane operating in a prismatic space, where pieces fall apart so quickly making it difficult to separate which is what, essentially making it easy for big business houses to manipulate the market under the nose of supposedly agile regulators. And the biggest question is who has put public money up for sale?