The Truth Behind Targeting Adani

IT WAS A bolt from the blue. Within a week of US short seller Hindenburg Research’s report on the Adani Group, the conglomerate faced what was perhaps the biggest test in its history. The group lost much of its huge market capitalisation, something for which it was feted across the world. The report came at a time when the government is planning a huge investment drive in infrastructure through a massive infusion of funds and private-sector participation.

Two turbulent weeks later, Congress leader Rahul Gandhi attempted to stoke hatred against domestic businesses through entrepreneurship-bashing rhetoric. In a speech in Parliament, he tried to shame private companies engaged in building India’s infrastructure and aiding the country’s strategic interests in the neighbourhood and on distant shores. His assertions, mostly unsubstantiated, mirrored the stance used by the Left to routinely demonise wealth and job creators. It is a dangerous moment, reminiscent of the 1960s when socialism ruled the roost in India and did incalculable damage to the country’s economy.

In his speech in Parliament on February 8, Prime Minister Narendra Modi elaborated on the vital importance of infrastructure in India’s economic growth. He contrasted the poor emphasis on infrastructure in the seven decades after Independence and the rapid strides made in the last seven years.

In its report, Hindenburg alleged that the Adani Group had indulged in stock manipulation and the prices of its shares were out of line with their actual value. It also made other allegations regarding corporate governance in the group. Within days, the conglomerate lost $120 billion in market capitalisation. The unprecedented volatility in Indian markets led the Western press to even begin questioning the foundations of “Indian capitalism”.

Soon, the Adani Group mounted a stout defence of its position and rebutted the Hindenburg report. Under the circumstances, a part of the response was strong to the point of being out of line. But in the context, it was also understandable. The CFO of the group, Jugeshinder Singh, likened the Hindenburg report-inspired sale of shares of the group companies to an “attack on India”. A statement issued by the company on January 30 had noted: “This is not merely an unwarranted attack on any specific company but a calculated attack on India, its independence, integrity and quality of Indian institutions, and the growth story and ambition of India.” Given the developments, it was seen by Adani-baiters as using the Tricolour and nationalist sentiment as a shield to cover alleged irregularities. Singh went farther and likened the sale of his company’s stock to Indian soldiers opening fire on their fellow countrymen under the orders of the British at Jallianwala Bagh in 1919.

The CFO could, at the most, be accused of speaking in a somewhat hyperbolic and out of line manner for a business-related statement. But it is a fact of history that countries, especially those in the West, have witnessed an alignment of national and commercial interests. The trend continues right up to the present day. Even if one ignores egregious examples from Latin America (the United Fruit Company and its capers in Guatemala being one) or West Asia (such as the overthrow of the Iranian nationalist government of Mohammad Mosaddegh in 1953 for the control of oil), the reality is that of governments backing their national economic champions. Everywhere except India, where any government support is automatically dubbed ‘cronyism’.

The question that needs answering is this: Even if the Adani CFO spoke out of turn and indiscreetly, did he say something that’s true but unpalatable? To cite another cognate example, curbs on H1B visas for employees working for TCS and Infosys could be read as an attack on India’s interests because of the contributions they make to India’s services sector. In 2020, the new US law spelt very bad news for workers in the Indian technology sector when the Trump administration suspended visas for highly skilled workers until the end of the year, ostensibly to create work opportunities for American workers in the time of the Covid-19 pandemic. Indian technology giants like Wipro, Infosys and TCS were directly affected, as were Google, Facebook and Twitter while hiring Indian talent.

There are several ways to hurt a country’s interests. Since the days of the mercantilist wars during the period of colonial expansion, countries have fought on behalf of their companies. England and France went to war over whether the East India Company should have the sole monopoly over India. Current political leaders pretend to be naïve when they talk as if governments fighting to undermine big corporate houses of other nations belong only to history and not to the present day. Again, while largely geared to protect the interests of their promoters and shareholders, mega companies themselves serve the interests of a nation where they are housed or their country of origin. There is simply no getting away from this truth. For centuries, one could think of hurting a country’s interests by hurting its companies. Everywhere, except in India, of course. Any company, group or conglomerate that takes commercial and geopolitical risks in the line of business is discouraged. And if it turns out to be successful, there is every chance—as the Adani Saga shows—that it will run the risk of being described as a beneficiary of government largesse. If anything, fancier expressions like ‘cronyism’ will be used to describe successful outcomes.

The Adanis, even if one is not ready to give them a certificate of innocence, have shown that they have the hunger and the capability for betting big and expanding business even against economic and commercial odds. Above all, they are not risk-averse. One cannot count many companies that would be willing to undertake the construction of a port in Sri Lanka which is considered to be a Chinese playground. Sri Lanka experienced the Chinese fleecing them and reducing Colombo to a listening post, if not a staging ground, for anti-India operations. And when the Lankans were looking for options to put themselves back on the road to growth, it was the Adanis who stepped in.

Again, in July last year, a consortium of the Adani Ports and Special Economic Zone (APSEZ) and Israel’s GADOT Group won the tender for the Haifa port that amounted to $1.2 billion. This was hailed as an “enormous milestone” by Israeli Prime Minister Benjamin Netanyahu. The Port of Haifa is the second-largest port in Israel in terms of shipping containers and the biggest in terms of tourist cruise ships. The Port of Haifa is the largest of Israel’s three major international seaports. The Adani Group had in January vowed to transform the skyline of this Mediterranean city as part of its decision to invest more in the country, including opening an Artificial Intelligence (AI) lab in Tel Aviv.

Prime Minister Modi spoke about the vital importance of infrastructure for India’s economic growth. He contrasted the poor emphasis on infrastructure in the seven decades after independence and the rapid strides made in the last seven years

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The hunger for expansion, speed and scale of growth, and the ability to stomach risk are now being held against the Adanis by their critics as the main exhibit of guilt is, in fact, what makes the group an attractive proposition for countries looking for “China-plus” options in their neighbourhood. The world is increasingly sceptical of China as most countries have realised that ‘help’ from China comes with strings attached. Once those strings are pulled, these countries are left with nothing but the fiction of sovereignty. It is probably here that Adani has become the apt target. Hindenburg is publicised as a short seller. But there could have been other interests that could have tagged on to the profit motive. They would like to see Adani wounded not because of what happens to the wealth of Adani. Hurting the conglomerate may not just mean hurting India’s ability and capacity but also restricting the options for countries in the neighbourhood that do not want to get sucked into a colonial relationship with China.

WHILE THE GROUP lost a huge part of its market capitalisation within a week as its shares received a hammering, the regulatory aspect of the situation was overblown. This became clear from the statements of regulators, banks and analysts after the bloodbath experienced by the group in various markets.

On February 3, the Reserve Bank of India (RBI) said in a statement: “There have been media reports expressing concern about the exposures of Indian banks to a business conglomerate… As per the RBI’s current assessment, the banking sector remains resilient and stable. Various parameters relating to capital adequacy, asset quality, liquidity, provision coverage and profitability are healthy. Banks are also in compliance with the Large Exposure Framework (LEF) guidelines issued by the RBI.” That very day, Fitch Ratings issued a statement saying, “There is no immediate impact on the ratings of the Fitch-rated Adani entities and their securities following a “short-seller report” alleging malpractices at India’s Adani group, and expects no material changes to its forecast cash flow.”

Banks like the State Bank of India (SBI), too, clarified that their exposure to the group was limited. SBI Chairperson Dinesh Khara said on February 3 that the bank’s exposure to the group was ₹27,000 crore, around 0.88 per cent of its loan book as of December 31, 2022.

The next day, Aswath Damodaran, a professor of finance at New York University’s Stern Business School, analysed the Adani Group’s situation and posted his findings on his blog. Damodaran took a hard-nosed look at the group’s finances and its capital structure. While pointing to problems in the group and India’s regulatory environment, he wrote: “It is possible that Hindenburg was indulging in hyperbole when he described Adani to be “the biggest con” in history… Adani, notwithstanding all of its flaws, is a competent player in a business (infrastructure), which, especially in India, is filled with frauds and incompetents.”

Damodaran noted that infrastructure companies in general have high debt levels as it is a capital-intensive sector. In the case of Adani, the debt levels are indeed high. At the beginning of January, the group’s debt stood at $27.3 billion. This was to be expected given the breakneck speed of the group’s investment spree.

If anything, before the storm hit, Adani had an ambitious investment programme over the five-to-ten-year horizon. In ‘Adani Portfolio Overview’, a January 2023 publication, the company outlined a $112.5-133.5 billion investment plan. Of this sum, most was to be invested in green hydrogen and green energy and accounted for anywhere from 60 to 70 per cent of the investment plan. This does not include planned investments in petrochemicals, cement, copper smelting and healthcare. These sectors tallied to another $13-18 billion over the same time period.

The group’s investments are truly national in scale and range from Gujarat to Assam and from Himachal Pradesh to Kerala. A tiny footnote in the Overview hints that these investments were in alignment with government policy of core infrastructure development and Atmanirbharta, and accounted for 100 per cent of investment.

On February 6, the group pre-paid an amount of $1.11 billion ahead of its maturity date of September 2024 as part of its commitment to reduce overall promoter leverage backed by shares.

If market volatility and anxiety began to fade in the weeks after the Hindenburg report, politics over the issue began to acquire a high pitch. It was not a coincidence that the opposition chose to disrupt Parliament during the Budget session to highlight the ‘Adani issue’. There were vociferous demands for a Joint Parliamentary Committee (JPC) probe. It is another matter that opposition parties that cried foul have all along wooed the group for investment in states as diverse as Rajasthan, Chhattisgarh, Maharashtra and Kerala.

The key allegations made by the opposition include the Modi government indulging in ‘cronyism’ to favour the Adani Group and that the two—the group and the government—were synonymous. The other allegation is that public-sector entities like the Life Insurance Corporation (LIC) had invested heavily in the group’s companies and that a crash in the stock prices of these companies was detrimental to the public interest. It is worth noting that LIC held around 8 per cent of its assets under management (in September 2022) in Adani entities. There were no allegations of malfeasance when these stocks had stratospheric valuations but when they crashed, charges that LIC had been ‘arm-twisted’ into buying these stocks emerged thick and fast.

The charge of ‘cronyism’ is equally misleading. The reality is that the rise of the Adani Group took place over a span of nearly four decades as India began its pivot from a state-controlled economy to a modern, private-sector-driven one. Adani’s story began in 1985, just about the time the Rajiv Gandhi government began liberalising some parts of the economy. At that time, the government had placed some 150 items under what was known as the Open General Licence (OGL) for imports. Under India’s byzantine system of controls, industry could not import what it wanted as first the government had to change the import-export policy, item by item. In that year, Adani signed an agreement with the Gujarat State Export Corporation (GSEC) that allowed him to import PVC (polyvinyl chloride). Three years later, in 1988, the Adani Group was formed with the establishment of Adani Enterprises Ltd (AEL). At that time, the governments in Gujarat and at the Centre were both Congress’.

In 1991, under the PV Narasimha Rao-Manmohan Singh regime, India began its journey of economic liberalisation. The ports sector—until then a government monopoly—was also liberalised. Among the first states to make use of this opportunity was Gujarat which issued a Port Policy Statement in December 1995. At that time, the Bharatiya Janata Party (BJP) was in power in the state. But the agency under whose aegis ports were to function—the Gujarat Maritime Board (GMB)—was created by a Congress government. Gujarat was one of the few states where there was consensus across the political spectrum on the path to liberalisation. Adani was one of the early beneficiaries of this change. He signed a contract with GMB in 1991 to develop the Mundra Port.

Rahul Gandhi’s assertions, mostly unsubstantiated, mirrored the stance used by the Left to demonise wealth and job creators. The charge of ‘cronyism’ is equally misleading. The reality is that the rise of the Adani Group took place over a span of nearly four decades

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By 1994, AEL had gone public and become India’s largest coal mining contractor and coal trader. By 2000, another landmark arrived: the group completed the first phase of the Mundra Port project. In 2006, the Manmohan Singh government gave multiple licences to the Adani Group for establishing a special economic zone (SEZ) at Mundra. During 2007 to 2008, five different approvals were given to the Adani Group and by the end of 2008, the group had moved into the mining sector to become one of India’s top power generators. Three years later, it had surpassed the Tatas, Reliance and Essar to become India’s largest private-sector thermal power producer.

THE STORY OF the group’s rising ambitions and its progress has continued well after 2014. But using 2014 as a break in time is illusory. The contention that everything gained by the group after 2014 is a boon from the Modi government is wrong. Perhaps the best example of this continuity is the group’s activities in the Mine Development and Operations (MDO) space. This began in 2013 with the signing of a contract between a Rajasthan power utility and the Adani Group during the chief ministership of Ashok Gehlot. The group has signed similar agreements in Maharashtra, Chhattisgarh, and Odisha, all opposition-ruled states. Interestingly, the group is also pursuing a port project in Kerala—at Vizhinjam—where the Left Democratic Front (LDF) government continues to back the container transhipment project despite vociferous protests. In Parliament, the behaviour of Left MPs is diametrically opposite to what their government in Kerala is doing: in Parliament, Adani is accused of malfeasance and cronyism.

The danger in such wild political accusations is twofold. One, it scares existing and potential investors about India. Two, more importantly, it puts extraordinary pressure on a corporate group that has continued to invest in infrastructure through the thick and thin of India’s economic swings, positive and negative. It is a well-known fact that investment growth is a weak part of India’s growth story. This has been the case for more than a decade now. One reason for depressed private-sector investment was the loss of appetite for investment among big companies after the ‘twin balance sheet’ problem emerged. Companies were overleveraged and banks were unwilling to lend. It took the Modi government’s strong political will to clear this mess with the Insolvency and Bankruptcy Code (IBC), 2016. This took almost seven to eight years. During this period, too, the Adani Group had continued with its investment plans. Every corporate group or even a small company evaluates economic opportunities before making an investment. But even then, investment in risky infrastructure projects requires a leap of faith, especially when a country’s economic prospects are dim. The danger today is that national economic champions may end up being arm-twisted for political reasons.

For political correctness, no opposition leader is ready to desist from spreading falsehood. There is a lot to be gained for the patrons of this hollow political correctness by opposing Adani. But whether or not an attack on Adani is an attack on India, it is not something to be seen as either an alibi for promoting the country’s interests or merely draping the Tricolour to instead protect the company’s commercial interests. In terms of timing, too, it is difficult to argue without being misconstrued. The Chinese cannot be accused of celebrating unnecessarily after seeing the bloodbath in the stock markets. This is without getting into what the New York Times headline said on February 5: “Adani’s rise mirrored India’s. Will the fall start now?” India is too big for this alarmist view. India has a stock market that is too diverse, its strength predates Adani’s growth, and it will endure beyond what happens to Adani.

India’s strength lies in the size of its economy. The Indian economy grew 13.5 per cent in the June 2022 quarter (Q1FY23), which was the fastest growth in a year, as the country’s GDP grew at 4.1 per cent in the previous quarter (Q4FY22), 5.4 per cent in the December 2021 quarter of FY22, and 8.4 per cent in the September 2021 quarter. In the June 2022 quarter, the world’s major economies, such as the US and the UK, witnessed contractions. In the September 2022 quarter too, India’s GDP grew 6.3 per cent. “Despite the geopolitical uncertainty and fear of a global growth slowdown, the Indian economy has shown resilience. In fact, the 2QFY23 GDP growth print remained next only to Saudi Arabia (8.6 per cent yoy) among the major economies… Notwithstanding this, there are pressure points and the Indian economy still has a lot of ground to cover which was lost due to COVID-19,” India Ratings has said in a report.

“In 2022, while the global economy was struggling amidst headwinds from slowing growth, higher inflation, and higher interest rates, India’s economy was resilient, and its growth was on a strong footing. Unlike other developed economies, India’s revival from Covid was not entirely dependent on fiscal and monetary expansion. The recovery was led by structural interventions like ‘Atmanirbhar Bharat’ and National Infrastructure Pipeline. Indian exports grew to around $440 billion in 2022 driven by effective Free Trade Agreements (FTAs) and global value chain integration. Major high-frequency indicators like GST collection, power demand, railway tonnage, domestic air passenger traffic, and passenger vehicle sales exhibited resilient strength. Indian banks credit rose 14.9% and remained a major supporter of the sustained economic recovery,” said the government in a recent statement.

It added: “Although global macroeconomic conditions were difficult, India was able to steadily navigate the crisis through swift policy action by the Reserve Bank of India (RBI) and focused intervention by the government. When inflation breached the RBI’s comfort level of 6%, repo rates were raised from 4% to 6.25% to keep the rising inflation in check. On the other hand, the government through its barbell strategy of combined safety nets (PM Garib Kalyan Yojana of providing food grains to more than 80 crore Indians) and agile policy response through various targeted schemes such as the MUDRA, PLI, and Start-up India helped in encouraging private capex. Improvement in tax compliances resulted in a monthly record GST collection of more than 1.4 lakh crore in December 2022, indicating a sustained momentum for 10 months in a row. The scope of ECLGS (Emergency Credit Line Guarantee Scheme) was extended by an additional year and provided required support to MSME entrepreneurs across the country, with working capital and loans. According to SBI estimates, around 12% (₹2.2 lakh crore) of the outstanding MSME credit has been saved from slipping into bad loans since the pandemic, thus saving 16.5 million jobs.”

The newfound confidence is expressed by unicorns and MSMEs venturing with grit into unknown and unfriendly territory. In that respect, the New York Times headline is wrong. Unless it is established that Hindenburg did not find associates who rejoiced at Adani’s woes, the proposition that an attack on Adani could be an attack on India itself should not be laughed out of court. Also because, when you see a short seller—otherwise belonging to the hard-nosed tribe of realists—praising India’s diversity and democracy, there are reasons to probe deeper into motives and timing before issuing certificates of innocence or hanging a corporate honcho in the market square.

About The Author

PR Ramesh

Siddharth Singh

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