Gautam Adani, chairman of the Adani Group, is usually a man of few words. So when he explained the reasons for the decision to withdraw Adani Enterprises’ Rs 20,000 crore follow-on public offer in a recorded video on Thursday, everyone was eager to listen. Adani said the company’s board felt that going ahead with the issue “will not be morally correct” as for him, “the interest of his investors was paramount.” It can be argued that the realisation has come a bit late in the day. In fact, the Group lost the opportunity to take a high moral ground after it decided to go ahead with the offer despite the collapse of group stocks following the allegations made by Hindenburg Research. The signal was clear on Day One of the offer itself when it was subscribed just 1% as the stock price fell well below the floor price of its public issue. Yet, the group took an aggressive stand, invoked nationalism and described Hindenburg as “Madoffs of Manhattan”, and stuck to its decision of going ahead with the FPO even though the offer price did not make any sense anymore. Was the Group expecting a miracle to happen?
The issue, finally, barely managed to sail through with generous help from a few overseas institutions and family offices of Adani’s fellow billionaires in India. That step may have been considered morally okay by the group, but very few bought into that story. Result: the Adani Enterprises stock collapsed 28% the very next day. In fact, the Adani Group’s market losses have swelled to more than $100 billion, sparking worries about a potential systemic impact. What prevented the Group from reading the writing on the wall and withdraw the FPO earlier isn’t quite clear. Meanwhile, Citigroup’s wealth unit reportedly stopped extending margin loans to its clients against securities of Adani Group and decided to cut the loan-to-value ratio for credit against Adani securities to zero on Thursday. The US lender’s move to restrict lending comes after a similar change at Credit Suisse Group AG. According to a Bloomberg report, some of the Group’s dollar bonds have been pushed into distressed territory, where they are being traded below 70 cents on a dollar. The Reserve Bank of India has also reportedly asked banks for details of their exposure to the Adani companies. Unconfirmed reports say the markets regulator is also examining the crash in shares of the Group and looking into any possible irregularities. Thus, the crisis the group faces is much deeper now.
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The charges made by Hindenburg, a self-declared short-seller, aren’t backed by evidence and admittedly some of them are quite old and already settled. The timing of the report also did raise questions as it was released just two days before the FPO was to open for subscription. The research firm had disclosed that it has “taken a short position in Adani Group Companies through US traded bonds and non-Indian traded derivative instruments.” So, the Adani Group was right in contesting them, but making the FPO a test case of its innocence wasn’t quite the right move. One should also remember that concerns about the Group have been flagged in the past by CreditSights, a Fitch Group unit, which called it “deeply leveraged”. Though CreditSights later said it discovered some calculation errors, it did not change its investment recommendations. Few broking houses do research on most Adani stocks, although some group companies are part of the main stock-market indices. This is not a desirable state of affairs for one of India’s biggest conglomerates. There is clearly a need for greater scrutiny and transparency. India’s regulators do have a challenge here.
