Adani’s Agnipariksha

If one thought Tesla had the most meteoric valuation rise amongst all global stocks, think thrice. That honour would be Adani’s. Over 33x in 3 years. Despite the pandemic panic. Despite the natural challenge of resources being finite. Despite the street talk that their yet-in-build-mode industrial and commodities play needs outcomes-yet-to-be-proven. Despite lapping up almost every 2nd large new business opportunities for a developed India to be. Despite entering into newer businesses faster than management consultants can even finish their advisory reports, or the regulations even fully drafted for those sectors. Simply because the markets felt that the group had clout in Delhi.

It won’t be amiss to say that Adani has a part to play, in executing a large part of the Indian growth story, especially in its infrastructure needs. It is not just Adani’s ability to dream big that merits his rise to success. Political patronage solely cannot be the success driver either. It sure could be a catalyst. One must understand that his execution capability to bring his plans to fruition is phenomenal. It was even a macho street talk amongst retail investors, that Adani closed a recent M&A transaction, without even the perfunctory due diligence, and the proud logic being that the company bought was an Indian subsidiary of an MNC, and its accounts would be in order. Hence the time saved & cost incurred on DD was better off, to be spent in quicker turnaround. Whether it was a fact or myth, such was his magic on the investor street, until a few days ago.

Gautam Adani, the man whose ports-to-FMCG global empire is now in the midst of a violent tsunami, because of a single report raised by an outside-of-India entity, whose claim to fame has been short-selling. In a capitalist world, short selling is absolutely agreeable. In fact, it has its merits too.

The short seller Hindenburg’s report alleged fraud and other irregularities, just before the Rs 20,000 crore Adani FPO (Follow-on Public Offer). Before these allegations were made, this amount was seen as too small for Adani to lose sleep or shirt over. But then turn of events made the FPO go through, with its moment of truth of what each stakeholder thinks about Adani. Yet in the FPO, his own employees subscribed to only 55 per cent of the shares earmarked for them. What made them stay away from their own company - which probably was aspiring to own a few percentage points of the Indian GDP?  Eventually, for whatever optics it serves, he chose ‘moral ground’ to return the money raised in the offer. 

One should not declare the Adani Group as guilty yet. They have to be given a chance to respond. But Hindenburg report has reminded the world of what people had been whispering, but not openly speaking. For example, even in the recent past, a Fitch Group unit had flagged the group as “deeply leveraged”. Later, one sniggered, when the same firm quickly said it had discovered calculation errors in its own report, but it did not change its investment recommendation. In India, very few stock broking firms do research on Adani firms. There is a need for greater scrutiny and transparency of firms which have high growth rates and are in public markets.  

But stock markets are different. The anonymity of mass trading and sentiment-based response to their perceptions is something that’s powerful against influential companies and promoters. It includes those who invested, either with the researched decisions or with speculation or greed or simply FOMO or due to folklore of the ‘big man with the biggest networks to make it happen’. In a crisis, no one is a friend. Markets also listen to any gossip or bravado stories. 

One has heard multiple theories about this crisis - a political hit job, a rival business house hit job, a political setup to keep a politician away from power, and so on. It is also evident that the Indian stock markets are interlinked to the vagaries of the global economy, something we seem to be in denial about.

Business counts

Natu dharmopa samharam 

Adharma palasamhitam 

Tadeva phala nunveti 

Dharmasch dharma nasanaha

(Verse 29 of Sarga 51 in Sunderakand -  says that we cannot escape any of our unrighteous acts or deeds, even if one has done many other righteous acts or deeds)

Nationalism does not cut ice. Nationalism is not a replacement for transparency. Patriotic fervour in a crisis management response is akin to patronising and insulting the investors. Business Performance & consistent data disclosures with the highest governance standards is a basic investor asks. That’s what capitalism is about. Markets price these in and also discount for lack of any of these attributes.

Adani Enterprises’ revenue had grown over 75 per cent in FY22, after three tepid years. Its net profit also fell. Its listed entities except for one showed similar downward numbers in pretax FY22. For infrastructure companies that are valued at 300x - 600x earnings multiples, one would expect far better numbers. 

Moral clothing  

Announcing the decision to withdraw from the FPO process and returning the subscription monies as “will not be morally correct” otherwise, was seen as an attempt to sound uprighteous. In fact, they lost moral ground, right when they decided to even go ahead with the offer after the crash of their group stocks, basis the allegations made by Hindenburg Research. The market had even signalled it on Day 1, when the issue was subscribed to only 1 per cent, as the stock price bottomed below the floor price of the issue. They had to use their billionaire friends' connections, either with or without the nudge of common powerful friends, to get the issue subscribed. The irony was that supposedly one of his assistance-in-need came from the man whom he dethroned from India’s richest man tag. But any such investments generally don’t come free or cheap. Think of it as an ‘I.O.U’ bond, with coupon rate and tenor not filled and callable by the party holding the IOU, anytime in the future.

But the point that’s still open is - that the disclosures are still pending about the allegations. Roundabout answers and the threat of legal action don’t seem to have assuaged the retail investors' perception and the confidence of the Indian Mutual funds - both of whom stayed away from the FPO. The Dow Jones Sustainability Indices (DJSI) has removed the group scrip from its indices. Unless full clarity emerges, the non-Indian global participants might have a similar view. The group dollar bonds are already in a distress zone, trading below 70 cents to the dollar. Banks will want more collateral for the loans. More financial institutions globally will start deeper scrutiny into the group. Similar could be the regulators’ scrutiny in markets they operate in, outside of India. And, then, there are the latest allegations around Vinod Advani.

Short selling is legal

Short selling is a legally allowed market activity. It is not that every short seller makes money. Short sellers generally help with liquidity, since for every short seller, there is a party on the other side of the transaction willing to pay the given price. Short sellers also help detect fraud, as their nose on the ground is more effective than most regulators (as they don’t have sufficient resources and talent). Profit, as a motive is a good incentive, for short sellers to spend time and effort in seed-funding their research in assessing a short-selling target. Forget Hindenburg for a moment, what about those hundreds or thousands of Indian investors who have also shorted, but not been counted in this melee?

The markets regulator, for its independence and technological prowess around market intelligence, has been unusually silent, especially for the first phase of this plot. Now, the Supreme Court has been petitioned. 

Usually, the stock exchanges, being the first line of regulatory market-defence mechanism would have asked the company, in public, to respond to the allegations. They did not. 

It is essential to remember that the very formation of SEBI as a market supervisor, was right after Indian capital markets had its first large market scam. Even the word ‘scam’ became mainstream, only after that scandal. In fact, credit for capital markets development has to be given to SEBI for bringing in governance mechanisms and adopting technology into the industry, to remove or reduce any form of arbitrage. But then the larger question that hopefully begets an answer - why should the entire investor base pay a heavy price for the alleged misdeeds of a few companies? That’s where the promptness of the market regulator should come in. Not as an afterthought.

This is more of an acid test for SEBI in its ability to handle large corporates. In 2022, it had to swallow bitter pill when the industry lobbied to change its own regulation that mandated the separation of chairperson and MD role for the top 500 listed companies. The industry lobby even openly called it ‘regulatory overreach’ in the presence of a senior minister at a public event. 

Our regulators have to work harder in building their organisation to be world-class, proactive and responsive, as well as transparent. In many instances, our regulatory standards are far ahead and better, than say China, in corporate governance, ability to provide for minority protection and ability to bring digital framework into mainstream corporate disclosures. But compared to a US SEC, we still have a long way to go in the ability to be far more proactive, and quick to check and prove market impunities. The ability of our multiple financial regulators to work on a common topic seems missing, as they operate in structural silos, even if they did have operational intent. Not all of our financial regulators have similar quality of market supervision or even bench strength of expertise. But then, it is in a crisis of market confidence, that the regulators have to showcase their neutrality and mettle.

What next?

“Bad companies are destroyed by crises; good companies survive them; great companies are improved by them.”

                                           ⁃ Andy Grove, Former CEO, Intel

Adani has reportedly hired one of the top law firms to litigate in the US. It would be interesting in now the case pans out. The US courts give latitude to the parties to demand from the opponent, documentary evidence for their arguments. This would be interesting as to who all are made a party to such a case. For an Indian company to fight this and clear its reputation would be a boost for its own image.

Forget the Madoff riff between the short seller and the company. Can Adani emerge a winner from this face-off, but with the trust and confidence of the investors that all is well (with) in his empire? Can the investors feel confident that he will build all that he has taken on? Can he complete the ports he is building, finish the highways he is building and operate the airports he has won or taken over? And many more, across his businesses.

These questions, and many more, wait to be answered.