Rahul Gandhi’s riveting narration in the Lok Sabha of how, in recent years, the Adani group’s business empire had rapidly expanded across many sectors, brought a new dimension to the whole controversy. Rahul said that if the Adani group is investing in sensitive sectors such as airports and defence, it is imperative for the country to know who its real investors are, via the 30-plus FIIs or shell companies operating out of tax havens like Mauritius. The real identity of beneficiaries of at least six such FIIs which have investments of over Rs 43,000 crore in the Adani group was also sought by Mahua Moitra in her Lok Sabha reply to the President’s address. The finance minister has indicated that SEBI will probe the nature of these shell entities. Hindenburg Research, and many Indian media reports before that, have alleged that these are related entities or proxies of the Adani family.
This question lies at the heart of the charges levelled against the Adani group by the Hindenburg report, which has alleged stock rigging and market manipulation by these proxy entities. The Adanis have denied allegations that the shell companies are related entities, but growing doubt among global market players has forced the group to announce an independent evaluation of compliance with laws and rules governing its financial structure.
This reflects the pressure on the Adani group to become more transparent about its financial structure. Aswath Damodaran, Professor of Finance at the Stern School of Business, New York, told India Today TV that at present, global markets are willing to believe the worst about the Adanis, so the group should use this opportunity to become more transparent about its corporate structure. Damodaran says opaque financial arrangements are common in many family owned businesses which exploit weaknesses in the regulatory regime to strengthen family control over the assets.
All these years, Indian corporates routing equity investments via shell companies in tax havens was seen as normal. It is a mechanism to avoid tax on capital gains or profits. Even foreign companies bringing FDI into India do so via tax havens.
For the first time in 2014, Prime Minister Modi made a big pitch under the aegis of G20 that tax havens should be phased out in order to discourage cross-border flows of black money, and that real time information sharing on such money flows should exist among G20 economies. An in-principle understanding to this effect was reached subsequently.
Given these initiatives, it is surprising that there is still little information about the vertical rise of Adani group shares in 2022, when its market capitalisation rapidly increased by $100 billion. Former SEBI chief M. Damodaran told The Wire that “eyebrows should have been raised” then. The hugely bloated valuations of Adani companies happened during this period.
Price to earning ratios (PEs) of 300-700 are unheard of for infrastructure companies which work on modest margins regulated by governments, in power tariff or airport user fees. A PE ratio of 300-700 implies that it would take 300-700 years for you to recover your investments at current annual earnings. Such high PEs are an invitation for attack by short sellers, who are integral to the market mechanism. Big tech companies like Facebook, Netflix, Amazon and others lost 40-50% of their market value in 2022 because of bloated valuations. Together, they lost $3 trillion of their share market value (that’s about the size of India’s GDP). No one there protested that the US was under attack.
We need a mature response to the recent meltdown in the Adani group. Prof Damodaran rightly points out it is an opportunity for India to clean up market governance further, instead of making it an issue of corporate nationalism. The Adanis cannot afford to invoke nationalism because over 70% of its current gross debt of $30 billion comes from abroad via foreign banks and bond holders. So foreigners have a bigger stake in the Adani group and would want to see it become more transparent.
The Adani group should in fact welcome the correction in its stock prices, which have reached more realistic levels. This might attract new global equity investors to come in at a lower share price and help regain lost confidence. Simultaneously, both the government and regulators must allay growing doubts among global investors about the opaque financial structure of not just the Adani group but also many other family-owned entities. This should be seen as part and parcel of the maturing of India’s market governance. PM Modi should particularly take this seriously, given his past commitments at the G20 to make cross-border financial flows more open and transparent. With much celebratory messaging from the government on India’s G20 presidency, this becomes even more important.
This piece was first published on The India Cable – a premium newsletter from The Wire & Galileo Ideas – and has been republished here. To subscribe to The India Cable, click here.