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Adani Defends Itself After Fraud Allegations. But the Real Victim May Be India’s Reputation

When you’re Asia’s richest man, logic dictates that the only way is down, but there was still something shocking about how Gautam Adani’s business empire imploded last week.

The Indian tycoon was left reeling after a Jan. 24 report by Hindenburg Research—a New York-based forensics research firm and short-seller—alleged decades of “brazen stock manipulation and accounting fraud” that amounted to the “biggest con in corporate history.”

Adani Group—India’s largest conglomerate with interests spanning ports, airports, manufacturing, and energy—denies the allegations and has threatened legal action against Hindenburg, which admits to taking a position to “short” (or speculate on the decline of) Adani stock.

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Still, the allegations wiped more than $66 billion in market value from Adani’s business empire by Monday, as well as more than $30 billion from founder and chairman Gautam Adani’s personal fortune, according to Forbes. It’s reportedly the worst financial blow ever experienced by an Asian billionaire and knocked him from third to ninth in the global rich list.

Indian markets stopped selling some Adani stock on Friday to stem the rout, and the company replied with a 413-page rebuttal to the allegations on Sunday. They are serious. While Indian regulations require that any publicly listed company must have at least 25% outside shareholders, Hindenburg alleges that large stakes in Adani Group subsidiaries are held by offshore shell entities run by Adani stooges in places like Mauritius and Singapore, drastically inflating the group’s stock and therefore its ability to borrow and leverage. In response, Adani called Hindenburg’s accusations “baseless and discredited,” and “selective regurgitations of public disclosures or rhetorical innuendos coloring rumors as fact.”

Given the oversized role Adani Group plays in India’s economy, the controversy has political implications for Prime Minister Narendra Modi, who like Gautam Adani hails from India’s western state of Gujarat. The pair are known to be close associates since the 1990s and Modi used an airplane belonging to the Adani Group amid his victorious prime ministerial campaign in 2014. Since that time, Adani’s wealth has risen from an estimated $7 billion to $120 billion, according to the environmental scrutiny group AdaniWatch.

Ultimately, however, accusations of official complicity in Adani Group’s alleged malfeasance may prove most damaging, undermining investor confidence in India’s $3.2 trillion economy. According to the Hindenburg report, “issues of corruption permeate multiple layers of government,” especially calling out the Securities and Exchange Board of India, or SEBI. Adani is correct when it says that many specific accusations within the Hindenburg report had already been investigated and cleared by Indian courts. But the sustained market plunge nonetheless is indicative of a lack of investor trust in the nation’s institutions.

“This has created a major risk now, not only for the Adani Group, but for the entire [Indian] market,” says Hemindra Hazari, an independent banking and economics analyst. “Hindenburg is openly saying that your regulator is protecting the perpetrators instead of punishing them—and the market by penalizing the share prices has taken cognizance of the charges.”

Adani, 60, is perceived to be closer to Modi than any other Indian oligarch. He was born to a Gujarat textile merchant and, after dropping out of university, spent his early career as a scooter-riding plastics trader. He later dabbled in precious gems before his big break with the development of a deep-water port at Mundra, which today is India’s largest commercial port.

Adani expanded his holdings in infrastructure, logistics, and energy, especially coal-related businesses. Today, he is often referred to as India’s “king of coal,” though he recently diversified into media, too. In December, he controversially increased his stake in New Delhi Television, better known as NDTV, an iconic Indian television station and one of the only mainstream broadcasters still critical of the Modi government.

How damaging the Adani controversy may be to India’s state finances is hotly debated. On Friday, shares of India’s banks and the Life Insurance Corporation of India plunged. Jairam Ramesh, a leader of the opposition Congress Party, has highlighted how state-owned banks have lent twice as much to the Adani Group as private banks. “This irresponsibility has exposed [Indians] to financial risk,” he said in a statement.

Still, while noting that the total debt of the top five Adani Group companies had doubled in the four years ending last March, Hong Kong brokerage firm CLSA says that Indian banks make up less than just 38%, with most borrowing via bonds, commercial papers, financial institutions, and intergroup lending. “The Indian banking system is relatively insulated from any potential downside risks,” CLSA said.

Yet the risk of contagion and decimated confidence in Indian bourses remains very real. The timing of the allegations is particularly damaging coming just before a $2.5 billion share sale by the group’s flagship Adani Enterprises Ltd that stood to be India’s biggest ever primary follow-on public offering.

“We must closely track all public sector banks & [public sector undertakings] who are investing in Adani shares now to shore up their share price,” tweeted activist-lawyer Prashant Bhushan on Monday. “The Chairmen & directors of these must be held to account for putting our money at risk.”

This presents the Modi government with a choice: try to restore investor trust through a thorough house cleaning —and risk alienating a powerful ally—or stand by Adani and dismiss the allegations as the machinations of invidious foreigners. Tellingly, perhaps, the Adani Group’s rebuttal has already played the nationalism card, calling the Hindenburg report “a calculated attack on India, the independence, integrity and quality of Indian institutions, and the growth story and ambition of India.”