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In the context of market integrity, the IRAI and RBI should go over the minutes of the LIC and SBI board meetings when the decisions to invest in Adani equity or debt were taken, notes Jaimini Bhagwati, former World Bank treasury professional.
The sharp downturn in the stock prices of the Adani group companies since the publication of the Hindenburg report on January 24, 2023, has been tracked exhaustively by Indian and international commentators.
However, there is no readily available information about whether the shorting of hard-currency bonds or any other securities of the Adani companies was on foreign stock exchanges or by using over-the-counter derivatives.
It is unlikely any shorting was done by foreign institutional investors registered with the Securities and Exchange Board of India since it would have been difficult to hedge the risks involved without getting detected.
The broader issue is whether there were any significant regulatory shortcomings or outright failures, given the economy-wide backward and forward linkages of the Adani companies via the capital markets and banking sectors of the country.
Accordingly, this article reflects on the alleged negligence of Indian regulators in the context of the anti-climactic return of capital to those who had subscribed to the Adani Enterprises follow-on public offer of Rs 20,000 crore (Rs 200 billion).
Ahmedabad-headquartered Adani Enterprises Ltd is listed and focused on mining and trading in coal and iron ore.
The names of the following Adani companies indicate their focus areas -- Adani Ports, Adani Power, Adani Transmission, and Adani Green Energy.
The Adani group has bought majority ownership in ACC and Ambuja Cement.
Additionally, Adani Airports Holdings Ltd is a fully owned subsidiary of Adani Enterprises Ltd, and it has taken management control of Mumbai airport from the GVK group.
The names of the Adani companies imply their significance for India's infrastructure sub-sectors.
It is noteworthy that they are not in any information- or artificial intelligence-related spaces in which companies have exorbitant valuations based on expectations of high future revenues.
The Hindenburg report has alleged that Adani family members have engaged in clandestine transactions in group stocks to keep share prices at artificially elevated levels.
Further, it has also said debt-service coverage (DSC) and the interest coverage ratio (ICR) are at precariously low levels.
This report claims the promoters hold more than 75 per cent of the equity of Adani companies and suggests that this has been furtively done by family members who operated out of tax havens.
According to Sebi regulations, the minimum public shareholding in a listed company is 25 per cent.
Even without these allegations in the Hindenburg report, market analysts were aware of the inexplicably high share prices of Adani companies and to an extent Indian mutual funds have limited exposure to Adani stocks.
The Life Insurance Company has invested a little over Rs 30,000 crore (Rs 300 billion) in the stocks of Adani companies and the State Bank of India's loans to companies of this group amount to about Rs 21,000 crore (Rs 210 billion).
According to Forbes magazine, US and European banks underwrote about $10 billion (Rs 83,000 crore/Rs 830 billion) of debt raised by Adani companies between 2015 and 2021.
Incidentally, only to compare the orders of magnitude, the 2023-2024 Budget outlay for the scheme under the Mahatma Gandhi National Rural Employment Guarantee Act is Rs 60,000 crore (Rs 600 billion).
Presumably, the risks involved for the LIC and SBI were discussed at the board meetings of these two public-sector financial institutions when they decided to invest in the equity of Adani companies or lend to them.
In the context of market integrity, the Insurance Regulatory and Development Authority of India and the Reserve Bank of India should go over the minutes of the relevant LIC and SBI board meetings when the decisions to invest in Adani equity or debt were taken.
On a related note, Sebi needs to check if board members of the BSE or National Stock Exchange raised any questions about the inclusion of Adani stocks in the Sensex and Nifty 50, which are the two major indices on these stock exchanges.
This is a materially significant issue because individuals or institutions that prefer to invest in indices rather than individual companies would have unwittingly bought Adani stocks by investing in a portfolio of stocks that mimic the Sensex and Nifty 50 stock indices.
Of the Adani companies that are listed, some have low DSC and ISC ratios and, before the Hindenburg report was made public, had extremely high price-to-earnings (P/E) ratios, ranging up to 300.
It would be expected that board members of the Adani companies, several of whom are senior retired government officers, would know that low DSC/ICR and unusually high P/E ratios are indicative of fragile financial health.
The internal and external auditors may have been concerned about the financial health of Adani companies and rumours that the ownership of listed Adani companies is concentrated beyond regulatory ceilings in the hands of Adani family members.
However, it is conceivable that an inspection of the minutes of board meetings by the RBI and Sebi may show that projections of cash inflows were credible and that all was well, including projected repayments relating to borrowings in bond markets of developed countries.
It may also be confirmed that board members of the Adani companies did flag the market, credit and operational risks involved, and the management was able to address all concerns.
On February 17, the Supreme Court ruled it would not accept the names for an expert group meant to look into the allegations in the Hindenburg report, in a sealed cover from the government.
The court stated it would 'select the experts and maintain full transparency'.
It is heartening that the court has indicated that those who would investigate the Hindenburg report's accusations against the Adani companies would be experts of unimpeachable integrity.
Hopefully, a close examination of Hindenburg's allegations would be completed soon and the report placed in the public domain.
Jaimini Bhagwati is a distinguished fellow at the Centre for Social and Economic Progress, a former Indian ambassador, and a former World Bank treasury professional.
