By Nantoo Banerjee
With government banks and financial institutions involved in massive funding in the lately stock-crashed Adani group enterprises, legislators from India’s main opposition parties are understandably concerned. Last week, even the Supreme court sought to know from the government and market regulator the steps needed to improve the regulatory and statutory mechanisms to “ring-fence” investors against volatility of the kind that singed Adani group shares. The apex court also wanted to know whether an expert panel led by a retired judge could be set up for a holistic review. A number of opposition MPs already kicked off protests and demanded an official investigation.
The total exposure of the Life Insurance Corporation of India and five government banks — SBI, Bank of Baroda, PNB, Canara Bank and IDBI Bank — in Adani companies could be close to Rs. 1,00,000 crore. It may be true that the Adanis have not defaulted in servicing the debt. However, the stock collapse of listed Adani firms, following the publication of the Hindenburg Research report, should be a cause of worry for lenders to the group as its future growth and expansion look uncertain under a tight debt regime. French energy giant Total has already put on hold a multi-billion dollar green hydrogen production plan with the Adani group. The latest signal by the US-based index provider MSCI changing the weightage of four Adani group stocks and Moody’s rating downgrade triggered further fall in Adani stock prices, last week. Such developments are bound to impact the business group’s need to draw fresh funds to run its committed projects and go for new ones.
The question is not on what the gross government bank and LIC lending to Adani companies mean in terms of percentage of their total exposure to the corporate sector. It is all about the sheer volume of advances given to the Adani group by government institutions with little regard for debt-to-equity ratio and realistic value of pledged Adani stocks. Government banks and LIC had earlier lost lakhs of crores of rupees as bad debt to several large business enterprises. Only last year, a consortium of banks lost nearly Rs.23,000 crore as ‘bad loans’ given to ABG Shipyard, also based in Gujarat. The banking regulator and the banking division of the finance ministry should have been concerned. But, they were not. Until it collapsed, the lending banks considered ABG Shipyard as sound as any other large bank borrowers. The RBI governor’s comment that the strength of the Indian banking system is much larger and stronger to be affected by an individual incident (without naming Adani) may appear to be unwarranted under the circumstances.
Few will blame the opposition parties for losing faith in government regulators such as RBI, SEBI and IRDA for overlooking the unusually fast growth of highly debt-propped Adani Enterprises in the last few years. According to Forbes, Gautam Adani had a net worth of $2.8bn in 2014, just before the national elections that led to Narendra Modi’s becoming the prime minister. Adani’s wealth had catapulted to $126.4bn until the Hindenburg Research report on January 24 sent his business into crisis. Gautam Adani’s net worth tanked more than half to $61.7bn in less than two weeks. The group lost the trust of the market. S&P Dow Jones Indices removed Adani Enterprises from its sustainability index. Last week, the Adani Group made a prepayment of $1.11bn towards loans ahead of their maturity in 2024, releasing shares that had been pledged by the family as collateral. The Adani group is trying its best to overcome the sinking feeling after the stock collapse. However, it may be too soon to say how far these steps will go in assuaging investor concerns.
If the Hindenburg Research report is wrong or highly motivated, it is time that the official regulators, if not the government itself, quickly institute a detailed investigation into the Adani group’s alleged stock manipulation and make the findings public in the interest of investors and the market. Hindenburg Research did not hide its intentions. The US-based forensic financial research firm analyses the equity, credit and derivative offerings of companies. It looks for corporate wrongdoings and then places short-term bets against them. The firm said it holds short positions in Adani Group companies through US-traded bonds and non-Indian-traded derivative instruments. The seven listed Adani companies have an 85 percent downside on a fundamental basis due to sky-high valuations, the report said. Adani’s meteoric rise has been linked with Modi’s ascendance to power. Their ties date back to the days when Modi was Gujarat’s chief minister and Adani got land at cheap prices, the report said. Adani had picked up assets like ports, airport contracts and coal mines across India to become one of the country’s most powerful businessmen within a very short span.
Among the concerns raised in the Hindenburg report are: the Adani Group uses a web of firms in tax havens to inflate revenue and stock prices and also provide cushioning to capital balances in order to make listed entities appear more creditworthy; Adani Enterprises had five CFOs over eight years, a red flag for accounting issues; and the independent auditor for Adani Enterprises and Adani Total Gas is a tiny firm called Shah Dhandaria, which has no current website, four partners and 11 employees. The report also cited previous fraud investigations by the Indian government, which had alleged money laundering, theft of taxpayer funds and corruption, totalling an estimated $17bn. The Adani group denied the allegations. It said the report was issued with a “mala fide [bad faith] intention” to damage its reputation, days before the group was set to hold a public secondary share sale to raise $2.5bn. The Adani Group alleged that the report’s “principal objective” was to derail the share offer.
Hindenburg Research allegations are serious. Notwithstanding the political slugfest over the alleged government role in the Adani group’s meteoric rise, the regulatory authorities must investigate into the allegations and possible nexus between the Adani group and government-controlled lending institutions. The bank fraud cases unearthed since 2015 are simply mind boggling. Among them are: ABG Shipyard Fraud Case (2022); Videocon Case (2019); Punjab National Bank Scam (2018); Kanishk Gold Bank Fraud (2017); Andhra Bank Fraud (2017); Vijay Mallya Fraud Case (2016); Winsome Diamond Scam (2016); and Rotomac Pen Scam (2015). A good number of the fraudsters are from Gujarat. The biggest of them was exposed only last year involving Gujarat’s ABG Shipyard, robbing a consortium of banks to the tune of Rs.22,842 crore. ABG Shipyard was sanctioned credit facilities from 28 banks and financial institutions led by ICICI Bank. SBI’s exposure alone was Rs 2,468.51 crore.
Incidentally, the non-performing assets of India’s commercial banks totalled Rs 8.35 lakh crore in March 2021. The loans that stayed unpaid by larger corporate borrowers, mainly from public sector banks, accounted for almost 77.9 percent of the total. Banks asserted that there were no concerns emanating from their loans and guarantees to the Adani group, the stock value of which plunged by a staggering $110 billion over seven days since Hindenburg Research accused the group of stock manipulation and accounting fraud. “We have lent to Adani (group) for projects, which are tangible assets and which have adequate cash generation. They have been able to meet their obligations. The bank’s exposure is around 0.88 percent of the total loan book,” said SBI chairman Dinesh Khara.
However, banks are normally convinced about the bankability of projects, before giving loans, although they may not always be right. On the positive side, the reports from global brokerages Jeffries and CSLA are somewhat relieving. The brokerages said that the Adani group’s debts don’t pose a risk to Indian banks. The CSLA report said that bank funds to the overall Adani group debt is less than 40 percent. Jefferies said that Indian banks’ exposure to the Adani Group is within ‘manageable limits.’ CLSA aggregated the consolidated debt of five Adani group companies: Adani Enterprises, Adani Ports, Adani Power, Adani Green and Adani Transmission. On an absolute level, it estimated that bank debt stood at Rs 70,000-80,000 crore of the Rs 2 lakh crore debt in FY22.
The current stock crash in Adani companies is bound to impact the group’s future growth and its business vulnerability. Given the size of the group and its involvement in projects in several non-BJP ruled states, including the Left-ruled Kerala, Trinamool Congress-run West Bengal, Biju Janata Dal-led Odisha, YSR Congress-steered Andhra Pradesh and Bharat Rashtra Samithi’s KCR-led Telangana, an official investigation and report on the Adani group would be welcome by all. It would be in the fitness of things that the Indian regulatory authorities make their own assessment, individually or collectively, of the Adani group’s shareholding practices, reasons behind highly inflated stock prices, debt-equity pattern and the group’s overall creditworthiness to allay the fears of Indian investors and calm the domestic market sentiments. (IPA Service)