The Big Fall

Whew! What a cataclysmic two weeks it has been for the Indian stock market! At the receiving end have been the scrips of Adani Group companies. At the time of filing this report, in the seven trading days since 24 January, the Adani Group had lost USD 108 billion, with the stock prices of the group companies crashing as much as 54 per cent. These developments have sent shockwaves in the market creating panic and uncertainty among the investor community. 

On 24 January, the Adani Group's market capitalisation was worth over Rs 19.18 lakh crore. After the release of the report by US-based short-seller Hindenburg Research, which accused the group and its promoter, Gautam Adani of indulging in accounting fraud, stock manipulation, money laundering and what not, the group companies’ share prices have been in a free fall. On 29 January, responding to the report and its allegations, the Adani Group called it "nothing but a lie". Yet, the shares of Adani group companies kept tumbling day after day. By February 3, the group lost over Rs 10 lakh crore in its market cap. The same day Adani Enterprises was removed from the Dow Jones Sustainability Indices. Two days prior to that and on the night of the Union Budget, Adani Enterprises announced that it has withdrawn its Rs 20,000 crore follow-on public offer (FPO) despite full subscription on the final day. This move also contributed to the uncertainties despite the claims that the Hindenburg report was a lie, untrue and written with mala fide intent. 

In fact, on 29 January, the Adani Group responded to unsubstantiated allegations and misleading narrative by Hindenburg Research in a 400-plus-page response, raising questions against the ulterior motives of Hindenburg which it said 'has conveniently ignored the Indian judiciary and regulatory framework'. The group in its response said that it is fully compliant with all regulatory and legal requirements, and that it is fully committed to the highest standards of corporate governance and ethical practices.

Cautious Approach Needed
A number of tax experts that we spoke to highlighted one common theme. A veteran chartered accountant said: “It is worth noting that Hindenburg Research is a short-selling research firm and its reports are often critical of the companies it covers. This means that the firm has a vested interest in the Adani Group's stock price declining, as it has shorted the stock. This implies that the firm stands to profit if the stock price drops. Thus, the allegations in the report should be cautiously considered, and it is necessary to request independent confirmation of the claims made.” And this fact has been declared upfront by the report itself. In the initial disclosure, the report states: “After extensive research, we have taken a short position in Adani Group companies through US-traded bonds and non-Indian-traded derivative instruments. This report relates solely to the valuation of securities traded outside of India. This report does not constitute a recommendation on securities. This report represents our opinion and investigative commentary, and we encourage every reader to do their own due diligence.”

Why did this happen? 
The Hindenburg Research report alleged that Adani Group had inflated its profits to attract investors. This has been denied by the Adani Group response. The report also alleged that the group had misrepresented the size of its business, its relationships with government entities, and its ties to businesses owned by the Adani family. Besides, it also said that Adani Group was in violation of Indian laws and regulations. Again, the group in its response denied these allegations calling them 'lies' and 'baseless/motivated'. In addition, the report questioned the company's environmental and social practices. All of these allegations caused investors to lose confidence in the company, leading to a crash in Adani Group companies' stock prices, experts said. 

But a larger outcry is related to the loans taken by the group companies over the past several years. Opposition parties are alleging that the fallout will impact the common citizens of India who have invested in State Bank of India (SBI), Life Insurance Corporation of India (LIC), and other banks. In response, SBI said on 3 February that its overall exposure to the Adani Group stood at 0.88 per cent of the loan book. In actual terms, this is estimated to be around Rs 27,000 crore. SBI Chairman Dinesh Khara said the bank did not envisage the Adani Group facing any challenge to service its debt obligations. He, in fact, stressed that SBI had not given any loans against shares to the group. "Lending to Adani Group projects is with regard to ones having tangible assets and adequate cash flows," Khara said, adding that the group has an excellent repayment record. He also said there has not been any refinance request from the Adani Group.

When asked if the bank is changing its diligence practices with regard to the Adani Group, given the ongoing events, Khara said the lender always insists on adequate equity to be brought in before releasing any amount. "Unless the equity is seen, the amount is not released… It is not so that we are waiting for any equity. Going forward as well, each such proposal will be evaluated on its own merit. It is a decision (that vests) with credit committees," he said. 

In a television interaction, Finance Secretary T.V. Somanathan said the risk to LIC and SBI from the Adani Group's stock plunge is limited. “SBI and LIC's exposure to any given company is far below the level where it should be a concern to any investor in the bank’s or in the insurance company’s policies. It is tiny. The fate of one company will not affect any of these institutions significantly and therefore there is absolutely no cause for concern for either depositors or policyholders or investors in any of the nationalised banks or insurance companies," he said.

On its part, LIC said it had invested about 1 per cent of its assets under management in the Adani Group. It added that Adani debt securities held by LIC were rated AA and above, which was in compliance with India's investment regulations for life insurance companies. For the record, LIC holds a 4.23 per cent stake in the flagship Adani Enterprises, 9.14 per cent stake in Adani Ports and 5.96 per cent in Adani Total Gas.

Action Thus Far
The National Stock Exchange (NSE) was among the first institution to take any sort of action in response to the sharply falling share prices of Adani Group companies. In fact, on February 2, NSE placed Adani Enterprises, Adani Ports, and Ambuja Cements under the additional surveillance mechanism (ASM), a measure to safeguard investors from any potential market volatility and sharp changes in share prices. 

ASM was introduced on 26 March 2018 after the Securities and Exchange Board of India (SEBI) and the exchanges decided to applied it to securities that have surveillance concerns based on objective parameters such as price/volume variation, volatility etc. The shortlisting of securities to be placed under ASM is done on the basis of criteria such as high/low variation, client concentration, PE, close-to-close price variation, market capitalisation, volume variation, delivery percentage, and number of unique PANs.

The Reserve Bank of India (RBI) has taken action in light of the sustained fall in the share prices of Adani Group companies and the withdrawal by the group its Rs 20,000 crore follow-on public offer. On 2 February, the RBI asked banks for detailed information about their exposure to the Adani Group companies.

On its part, SEBI stated on 4 February that it is committed to preserving the integrity of the stock market and has implemented necessary surveillance measures to address any excessive volatility in individual shares. Without specifically mentioning the Adani Group, SEBI noted that unusual price movements in the shares of a business conglomerate had been observed in the preceding week. The capital markets watchdog noted that its surveillance measures, such as the ASM framework, are triggered automatically under certain conditions of price volatility in any stock. SEBI further said that if any information regarding specific entities comes to its attention, then appropriate action is taken after due examination. It reiterated that it has consistently followed this approach and will continue to do so in the future.

It’s unclear how the saga is going to unfold in the days and weeks ahead, whether there be any official investigation into the accusations, and if there is one, whether it will be carried out by SEBI, RBI, tax agencies or through an apex-court monitored body, as demanded by the opposition parties. Watch this space for new developments.

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