“In a room where people unanimously maintain a conspiracy of silence, one word of truth sounds like a pistol shot.” – Nobel laureate Czeslaw Milosz (1911-2004)
On January 24, while the rest of India was busy preparing for Republic Day (January 26), a report by US-based short-seller firm Hindenburg Research shocked the nation. In the report, Hindenburg alleged that a man who was at that time the world’s third-richest, Gautam Adani, was pulling the largest con in corporate history.
The firm alleged that the Adani Group had been involved in brazen stock manipulation, money-laundering, and accounting fraud for decades. The report also highlighted that the stock valuations of seven listed companies of the group were 85% overvalued.
According to Hindenburg Research, a 106-page report was prepared over the course of two years, and it holds short positions in Adani Group of Companies through US-traded bonds and non-Indian-traded derivatives, along with other non-Indian-traded reference securities.
The report claims that these statements were supported by documents obtained from the Indian government and regulatory authorities. It appears the firm did a detailed investigation before taking a short position.
One of the main concerns raised in the report is the issue of corporate governance at Adani Group. According to the report, members of the Adani family created and oversaw “a massive labyrinth of offshore shell firms” in tax-haven nations like Cyprus, Mauritius and the United Arab Emirates with, Hindenburg alleged, no reported employees, independent addresses, phone numbers, or online presence.
Despite this, they have collectively moved billions of dollars into Indian Adani publicly listed and private entities, often without required disclosure of the related party nature of the deals.
Gautam Adani’s brothers Vinod and Rajesh, as well as his brother-in-law Samir Vora, are among those listed in the report for various reasons. The report further states that Vinod Adani and his close allies were purportedly in control of 38 shell firms situated in Mauritius, and he was also “covertly controlling” additional businesses in Cyprus, the UAE, Singapore, and several Caribbean islands. In the report, Hindenburg asked 86 questions to the Adani Group.
On January 29, Adani Group issued a 413-page response alleging that Hindenburg had made misleading claims and that this was not merely an unwarranted attack on any specific company but a calculated attack on India, the independence, integrity, and quality of Indian institutions, and the growth story and ambition of India.
Adani Group hoped that such a nationalistic statement would put all allegations at rest. On the contrary, Adani shares have seen the worst decline in their lifetime.
A day after Hindenburg released its report, Adani Group entities lost about US$9 billion in the stock market, and the losses have continued. Despite rapid sell-offs, Adani Enterprises gave the go-ahead for a $2.5 billion follow-on public offer on January 27. However, the FPO was not received well in the market. Adani Enterprises said it would refund the FPO’s proceeds.
Are Indian regulators doing their job?
The Adani Group’s $120 billion loss in market value after Hindenburg Research accused it of fraud roughly equates to India’s annual infrastructure budget. More important, one of the key investors of Adani is the Life Insurance Corporation of India (LIC), the largest public-sector insurance company, which has invested $4.47 billion in Adani companies.
India’s public-sector banks had lent more than $9.9 billion to Adani’s five companies as of March 2022. But the market bloodbath has eroded a little over $2 billion of LIC’s wealth. Interestingly none of the private insurance companies has invested in Adani. Reports have also indicated that LIC investments constitute more than 98% of the entire insurance industry in the Adani Group.
LIC’s holding in Adani Group companies has reportedly seen tenfold growth since 2020. This, in turn, raises serious concerns over the high exposure of PSU (public sector units) investment into an the conglomerate, as these are the hard-earned savings of millions of middle-class Indians.
But despite these concerns deserving a serious response, the markets regulator SEBI (Securities and Exchange Board of India) and the central government have maintained a continued silence. Even though the opposition parties have questioned Prime Minister Narendra Modi’s silence and demanded a joint parliamentary committee in Parliament, the government has been suppressing discussions in Parliament on the Adani meltdown.
The reason is obvious. Gautam Adani’s closeness to Modi – a politician from his home state of Gujarat – is well known. Although the businessman says he hasn’t sought or received any political favors, the facts don’t support it.
Concerns have been raised about the relationship between a key official at SEBI, the statutory body that controls the securities market in India, and the chairman of Adani Group. Cyril Shroff, a noted lawyer who sits on the SEBI Committee on Corporate Governance and Insider Trading, is the father-in-law of Karan Adani, son of Gautam Adani. Surprisingly, he also counsels the Adani Group on legal matters.
The ruling Bharatiya Janata Party (BJP) has not come out openly on the issue. It is not allowing discussion on this matter in Parliament, nor is it heeding the demands of the opposition for an impartial inquiry by a joint parliamentary committee so that people can be aware of the truth.
Reacting to the opposition demand, Modi has told the lower house of Parliament that “trust reposed by millions of people” was his protective shield, which cannot be breached by abuse and allegations from his detractors. But an investigation is a fair demand to restore confidence in people and the market.
Why is Modi not able to detach himself from Adani? The reason may lie in the electoral reforms of 2017.
Electoral bonds: The reason behind Modi’s silence
In 2017, the Modi government introduced an electoral bonds scheme to cleanse political funding in India. The central idea behind the scheme was to bring about transparency in electoral funding in India. It allowed political parties to accept money from donors whose identities were kept anonymous if the donation was below 20,000 rupees (US$240).
The political parties receive electoral bonds issued by the public or corporations. The State Bank of India, India’s largest public-sector bank, is the solely authorized to sell and redeem the bonds. The scheme has been challenged on the ground that it lacks transparency. Critics argue that the anonymity of electoral bonds is only for the broader public and opposition parties.
On the national level, of all electoral bonds purchased since 2017-18, the BJP received two-thirds of the total, or 65% nationally.
According to a report by the Election Commission in 2021, the BJP reported the highest corporate donations for the seventh year in a row. Certainly, there is a conflict of interest. If Modi acts against the corporates, their party donations are likely to decrease. But if no action is taken on corporate misconduct, the party will likely receive better donations. In this way, it will be a win-win situation for both the corporates and BJP, but at the expense of the hard-earned savings and investments of the general public.
But can the common Indian overlook the Adani issue, corporate mismanagement, and billion-dollar losses for the sake of Modi’s image? Only time will tell, but there is little doubt that it has damaged India’s reputation and raised serious concerns about the Modi government’s functionality.