Adani-Hindenburg saga: Fund managers say governance, transparency issues still loom large over Adani

Around early-February when the Adani-Hindenburg issue was at its peak, there were many in the markets—and outside—who were highlighting a data point to support their argument that there were many shortcomings related to the conglomerate. They drew attention to the fact that mutual funds (MF), which channelise huge amounts of retail money into the stock markets, have stayed away from stocks of Adani Group firms even though the conglomerate is one of the largest business houses of the country.

It is not that MFs do not own shares of Adani Group companies, but given the spread and size of the Gautam Adani-led conglomerate, the exposure of mutual fund houses is minuscule, say market watchers. For instance, MFs hold just 1.19 per cent stake in Adani Enterprises—the flagship company of the conglomerate—even as the stake is held through 88 different fund schemes, per data from Value Research. For perspective, MFs hold a cumulative 5.81 per cent in Reliance Industries through 443 MF schemes, according to BSE and Value Research data.

Further, data shows that there are as many as 153 MF schemes that hold shares of Adani Ports but the cumulative stake is only 4.43 per cent. The rest of the group companies have even fewer number of MFs holding stakes in them. Incidentally, exposure through exchange-traded funds (ETFs) and other passive schemes that mirror a benchmark—which have Adani Group companies in it—cannot be counted as taking exposure as the fund manager has practically no choice in terms of stock selection.

Meanwhile, the huge run-up in valuations—shares of most Adani Group companies more than doubled in 2022—along with concerns related to governance, transparency and free float are cited by fund industry participants as key reasons for staying away. But with the valuations having taken a hit—Adani Green Energy, Adani Transmission and Adani Total Gas are all down over 80 per cent from their 52-week highs, while Adani Enterprises is also down nearly 70 per cent—will MFs take a renewed look at the group and invest?

Not really, say top officials of some of the leading MF firms in the country. They are still sceptical about investing in the group as valuation was not the only reason they kept away, they explain. “There are nearly 45 fund houses in the country and most active fund managers stayed away. That says something,” says the CEO of one of the largest MFs in the country, wishing not to be named. “I don’t think the industry has anything against the group. Everyone agrees that it has built some phenomenal assets in the infrastructure space. But when it comes to stock, valuations, quantum of free float and the swift run-up, it is a different story. When we did not invest last year when there was so much pressure to invest, there is very low probability of doing that now,” the person adds.

The low free float of most of the group companies has been in the news for long. While minimum public shareholding norms stipulate that promoter holding cannot be more than 75 per cent, there are many large listed firms that have promoter holding of much less than 75 per cent. For instance, the promoter holding of Reliance Industries is around 51 per cent.

In the case of Adani Enterprises, Adani Transmission, Adani Total Gas and Adani Power, all have their respective promoter holdings near the 75 per cent mark. More importantly, fund managers feel there is a red flag in terms of the genuineness of public holding due to the absence of well-known domestic and foreign institutional investors. The CEO of another MF says that the conglomerate has taken no initiative to address these concerns. “Every fund manager wants to buy a good business at a good price. There were concerns even before Hindenburg. We have faced so many investor queries and complaints that since we didn’t buy Adani, our schemes were underperforming. But we stuck to our approach and now investors are not complaining. Our risk management team always had concerns related to transparency and governance and, hence, we stayed away,” says the CEO.

Fund managers say that the group needs to address the concerns in a transparent manner to win the confidence of the investor community. “There have been some announcements related to the group mulling an independent assessment of all disclosures and transactions but there has been no concrete action post that. Things like repaying debt, buying businesses and releasing pledged shares are fine, but what the market is looking for are initiatives aimed at enhancing the long-term governance quality,” the chief executive adds.

To sum up, the consensus among fund managers seems to be that while the stock prices have changed and valuations are much lower than earlier, the way the group does business has not changed yet. And MFs are holding on to their wallets.

@ashishrukhaiyar