Questions rise after Adani scandal
• The Indian government needs to break its cozy ties with big business — for only then can it lay the groundwork for an alternative-asset industry
As the Adani Group grapples with uncomfortable scrutiny, there’ sa palpable nervousness in India about what will happen next.
In just over a quartercentury the once-modest commodity trader from Ahmedabad has morphed into the country’s largest infrastructure player, a debtfuelled behemoth overseeing a dazzling array of hard assets at home, as well as in Australia, Indonesia, Sri Lanka and Israel.
Allegations that billionaire Gautam Adani has benefited from his proximity to Prime Minister Narendra Modi —
strenuously denied by the group — are being raised relentlessly by the Congress Party’s Rahul Gandhi and other opposition leaders in a bid to shake Modi’s seemingly ironclad grip on power in the lead up to 2024’s national elections.
All that’s happening largely in New Delhi, India’s political capital. The big question in India’s financial capital Mumbai, however, is more forwardlooking.
How will the country fill the gaping holes in its infrastructure if the sector — already plagued by chronic low profitability —
loses access to much-needed global financing in the aftermath of the Adani scandal?
It’s been nearly two months since New York-based Hindenburg Research accused the Indian businessman of “brazen stock manipulation and accounting fraud”. Though the group responded with a 413page rebuttal, and Florida-based emerging market investor GQG Partners bought almost $2bn (R36.3bn) of its stock, the market value of Adani firms is still more than $100bn lower than before the short-seller’s report. The Indian Supreme Court has set up a six-member committee to probe the allegations.
Adani is a gigantic asset owner, in control of a number of ports, airports, coal mines, power stations, transmission lines, city-gas networks, solar farms, roads, and data centres. He stepped into a breach. Domestic institutions, such as the Life Insurance Corporation (LIC) of India, are simply not wired to own stuff that produces steady cash flows. So scared has LIC been of the country’s Rent Control Act of 1948 that it hasn’t liked to buy tenanted buildings in the past — only vacant ones.
Toll roads, which earn a steady revenue stream for up to 30 years, would also be a suitable asset class for a life insurer with long-term liabilities. Except that Indian insurance firms don’t have the mandate to invest directly in specially created private-limited firms in which concessionaires typically house their highways. No such rules apply to the likes of New York Life Insurance, which recently picked up a 49% stake in such a firm developing a commercial property on the outskirts of New Delhi.
If patient, long-term money plays a more active role in the country’s economy, entrepreneurs such as Adani would have no option except to focus on building new ports and airports rather than bloating their balance sheets with preexisting ones. Sheer competitive logic will ensure that financial institutions with low cost of capital and long-term charters emerge as asset-owners.
Diffused ownership would also help depoliticise the sector. The state-controlled LIC finds itself in the hot seat for its $4bn equity and debt exposure to
Adani when other local institutions such as mutual funds were largely sitting out the five-year, 2,500% rally in the group’s flagship company. There would be far fewer questions about its conduct if, instead of backing a controversial tycoon, the insurer got behind actual cash-generating assets — both at the project level and when they’re bunched together into investment trusts, as rentearning bouquets.
Project execution requires entrepreneurial hustle. Asset ownership needs balance-sheet strength. Separating the two will depend on political will. The historically incestuous relationship between India’s big business and government, made worse by the opaque electoral bonds introduced in 2018 by Modi’s party, will have to change radically. If politicians do pull off a clean break (even though it’s against their own interest), the next step may be to prepare the groundwork for an alternative-asset industry.
Prominent Mumbai financiers such as Srini Sriniwasan and Rashesh Shah are doing just that. Sriniwasan, a former investment banker with Goldman Sachs’ nowterminated joint venture with Kotak Mahindra Bank, helped set up Kotak Investment Advisors, an alternative-asset firm with $8.8bn in assets under management across realestate funds, private equity, private credit, infrastructure and data centres. Shah’s Edelweiss Financial Services has deployed $1bn-plus of equity across alternative and distressed assets, insurance, nonbank lending and mortgages, mutual funds and wealth management. Having sold a majority stake in its wealth unit to Hong Kong’s PAG in 2020, Edelweiss is now a lean investment company with just 48 employees.
For Sriniwasan and Shah, the goal is to assemble large, patient pools of capital in which investors will share the risk. This is a far better model for funding long-duration assets than using bank deposits maturing in a couple of years — or, deploying mutual-fund money that can get pulled at a minute’s notice. In recent years, India has seen disastrous consequences of both.
In the absence of the right kind of home-grown capital, foreign money is calling the shots. The Canadian public pension fund, known as PSP Investments, as well as the Canada Pension Plan Investment Board and Caisse de dépôt et placement du Québec have aggressively plucked highyielding opportunities. Canadian pensioners are relying on India for a better retirement.
Meanwhile, workers in India may have to put up with bad infrastructure for another generation because the institutions to which they’re making provident fund and insurance premium contributions aren’t ready to be asset-owners.
“Once all the risk of building an asset is in the rear-view mirror and cash generation starts, we happily enable retirees in the West to collect annuity incomes on the tolls we pay,” Sriniwasan said recently.
When it comes to infrastructure, India’s 1.4-billion people have only ever known two alternatives: Either the resource-starved government will undersupply, or the private entrepreneur will overcharge. The notion that financial institutions can use an individual’s own future wealth to give her a better life at an affordable cost is yet to take hold. And that’s the main reason infrastructure in India is such a cesspool of intrigue.