Adani ‘scandal,’ stocks meltdown ominous signs for India’s financial system
The beleaguered business empire of Indian multi-billionaire Gautam Adani, widely reported as a close ally of Prime Minister Narendra Modi, is swirled in an evolving “credibility crisis,” as a US-based investment company’s report accused Adani Group of having long engaged in “stock market manipulation, accounting fraud and money laundering.” Founded in the 1980s as a commodity trading group, Adani has become a conglomerate of both national and global significance.
The fraud claims, made public on January 24 by Hindenburg Research, have spooked investors and caused voracious sell-offs of seven listed Adani Group companies. The relentless selling has wiped out a whopping $110 billion from the market value of Adani companies in the past two weeks, literally cutting the value of Adani’s conglomerate in half. The Adani meltdown has also dragged down the overall Indian equities, with the NIFTY 50 index of Indian stocks dropping to its lowest level since October, defying positive investor sentiment during the same time span elsewhere in the world.
The shock and anxiety is spreading among global investors who rush to reevaluate their weighting of Indian assets, market watchers say. The Adani stock rout is sending shockwaves across India, with global institutions and investors increasingly fretting about the systematic risk the Adani crisis may cause to India’s financial stability. On Friday, the outlooks on Adani Group’s credit scores were slashed to negative by S&P Global Ratings, Bloomberg reported.
Whether the Adani saga will keep spiraling and cause a bigger financial crisis in India remains unknown and is to be closely watched. It is evident that Adani Group’s plummeting stock and bond prices have raised serious concerns about potential wider complications on India’s monetary system as well as the sustainability of India’s economy. Last week, throngs of jittery investors chose to dump Indian stocks across the board, reducing their investment portfolio of Indian assets.
To keep the fear from wildly spreading, it is imperative for Indian authorities to launch a robust probe into Adani’s business practices, to give investors a clear signal that any frauds and mismanagement will be taken seriously and dealt with – only doing so could help maintain investor confidence in India.
The Securities and Exchange Board of India, the market watchdog, on Friday launched a preliminary probe to examine the rout of Adani shares, looking into any “irregularities” or “scandals” ever committed by the conglomerate, whose businesses include sea ports, coal mining, building materials, new energy and other areas. And, the RBI, the country’s central bank, is checking Indian banks’ exposure to the Adani Group in a bid to prevent the crisis from deteriorating and jeopardizing the country’s financial system.
One of the biggest challenges faced by India is the perceived financial risk that investments may not generate the promised return, both because of the entrenched bureaucracy that can make it challenging to do business there, and also because of potential corruption and mismanagement issues.
Hindenburg accused the Adani group of “brazen” market manipulation and accounting fraud, claiming that a web of Adani-family controlled offshore “shell entities” registered in tax havens were used to facilitate corruption, money laundering and taxpayer theft. The most dramatic claims made by Hindenburg allege that Adani uses “shell companies” to manipulate the share prices of its listed ones.
The Adani crisis may have started a confidence crisis in Indian shares, and that could have broader market implications. On Friday, Adani responded to critics of his close ties to Modi, dismissing claims his companies had avoided government oversight. But investors remained highly suspicious. Credit Suisse and Citigroup’s wealth arm are no longer accepting Adani bonds as collateral for loans, which means the investment banks have cut the lending value of bonds issued by Adani companies to zero.