The Adani meltdown doesn’t seem to be stopping anytime soon. Even as I write this column, seven out of ten Adani Group stocks are in the red. Regulators, politicians, courts—the Adani-Hindenburg saga continues to grab headlines and dominate discussions in the markets and in corporate circles.
Amid the din, it is necessary now—nearly a month after the Hindenburg iceberg hit the Adani Group just ahead of its now-abandoned follow-on public offer—to step back and understand the key takeaways from l’affaire Adani. What really does the Adani story mean for India’s markets, investors, regulators and, indeed, the corporate sector? Let’s start with the massive surge the group’s stocks saw for the better part of 2022. The combined market capitalization of the group rose over 100 per cent, becoming the story all investors were following with awe. The Adani Group could do no wrong, it was betting big on the India infrastructure story and hence the run-up, investors and analysts argued, was justified. Valuations of the group’s stocks had shot through the roof, but the rise continued unabated, propelling Gautam Adani to the stratospheric level of the world’s third richest person. Today, Adani is at No.27 on the Bloomberg Billionaires Index, and his wealth decline in dollar terms in the year to date, according to the index, is a staggering $74.5 billion. By contrast, Mukesh Ambani, who is often pitted against Adani in the wealth sweepstakes, is currently at No.10, having been much lower than Adani in the wealth rankings for several weeks last year.
Coming back to the stock surge and high valuations. India’s former chief economic advisor and current IMF executive director Krishnamurthy Subramanian argues in a recent article Was Adani Stock Rise Really a Con? that an explanation for the soaring valuation at the time could be a combination of public capital spending and, what he calls, “irrational exuberance.” Subramanian points out that the market value for flagship Adani Enterprises remained in line with those of peers during 2002-15 and 2016-21, but the same metrics become multiples of those of peers post-2021. Clearly, 2022 was, for want of a better phrase, a breakout year for the group.
There’s another angle to this, something that global valuations guru Aswath Damodaran has repeatedly referred to in his comments on the Adani issue—the obsession with the group to retain a very high level of control. “It is no secret that family group companies are controlled by the families that run them, but the degree of ownership that the Adanis have in their companies is high, even by Indian family group companies,” Damodaran writes in his blog. Promoter holding in Adani Enterprises is at 73 per cent, Adani Power 74.97 per cent, Adani Transmission at 74.19 per cent and Adani Total Gas at 74.8 per cent.
This, in essence, is what smart analysts in the market reckon led to valuations which are pretty much cosmetic given the high levels of promoter holdings. Investment bankers and those following the Adani story agree privately that the valuations the group saw are hardly the result of any real price discovery. Retail investors who have such limited holdings can make noise, but their holdings don’t aid price discovery. And when stocks which have run up to unrealistic levels on the back of low free float fall—as they did following the Hindenburg allegations—they can knock the bottom off the companies.
The Adani affair has brought to the fore the issue of governance. And while it is true that there are several strong assets on the ground, generating predictable cash flows (something repeatedly cited by the Adani Group in defence of the charge that their debt levels are a cause for concern), the key issue isn’t so much the debt levels, but the lack of adequate transparency which can assuage the fears of investors and foreign lenders.
That being said, the Adani affair has several lessons—for investors, companies and even regulators. At a time when millions of new investors have entered the equity markets, it is imperative that investors do their due diligence before they put in money in the equity markets. As former Securities & Exchange Board of India (Sebi) executive director J.N.Gupta, who has seen many a market boom and crash during his time at the regulatory body and now runs proxy advisory firm Stakeholders Empowerment Services, says, investors should never go by trends or hype, and must always do detailed analysis before investing. Equity, it must be remembered, is fraught with risk and those that are patient reap the benefits of the actions of the impatient, he points out.
READ MORE: Adani under attack: Can the billionaire survive the Hindenburg onslaught?
There are a number of lessons for companies too. The biggest one to be taken from the Adani story is that no amount of transparency is really too much.
Transparency, like sunlight, is the best disinfectant after all. The Adani group may well be realising that, as story after story pops up in Indian and foreign media and their media managers rush to explain their point of view. The lesson is, don’t just follow the rule book—a group of the size, scale and impact like that of the Adanis needs to go beyond that and set exemplary levels of governance. Be in touch with shareholders on a regular basis, and update them on the developments around borrowings, share pledges, investments. And be realistic around investment and growth plans. The major error the Adani Group may have made is to have become unrealistically aggressive in their growth ambition, bolstered further by the unrealistic valuations in the market. Result? The $107-billion growth plan is already being pared and buyout plans dropped.
Coming back to the question of control and free float, what is possible at 74 per cent is also possible with 51 per cent. Companies must realise it is always best to broadbase public shareholding, and consequently reduce volatility for the investor community. And, more important, undertake periodic peer audits of companies to establish high levels of credibility around the figures they puts out.
For regulators like Sebi, while it is often a Herculean task to get to the beneficial owners in case of some sections of foreign portfolio investors, the effort must be to collaborate with overseas regulators—and Sebi has that clout now—to ensure the sanctity of the portfolio investments coming into Indian stock markets. Complex derivative structures by which foreign investors take positions in Indian markets are a reality. Indian regulators will need to be aware of that and arm themselves accordingly. Shriram Subramanian, who runs another proxy advisory firm, InGovern, tells me that the problem of fuzzy beneficial ownership is a real one in Indian markets and is the key challenge for regulators.
This apart, a nudge or two to companies to ensure they broadbase their public shareholding will also go a long way in preventing the kind of volatility witnessed in the Adani Group stocks.
Finally, the good news. Episodes like the Adani-Hindenburg faceoff, no matter how brutal the attack, are unlikely to shake the foundations of the Indian market, given the very strong checks and balances which currently exist at the level of the stock exchanges. Indian markets today are resilient, automated and, if stock exchange authorities are vigilant, the rest of the market will remain largely unaffected by developments like Adani. This is the case even now, with the broader markets remaining unaffected by the Hindenburg saga.
Companies large and not so large, however, must remember that nothing works like good governance. That is the biggest lesson the allegations by Hindenburg, the little-known American short seller, who admits to have taken short positions in Adani Group companies through U.S.-traded bonds and non-Indian-traded derivative instruments, could have helped bring forth for Corporate India as a whole.
The writer is Editor, Business Today