Why Adani’s $100 Billion Loss Hasn’t Flooded Indian Markets

When shares of the Adani Group, until recently India’s largest conglomerate, began their free fall late last month, losing more than $100 billion in days, some observers feared the collapse could plunge the country’s capital markets. and with it the Indian economy.

That would be a frightening prospect not only for India but for the whole world. The country’s economy has recently overtaken Britain’s and is now the fifth largest in the world, and it is the only major – including China – to have shown strong and steady growth since pandemic restrictions were eased.

But fears of broader market contagion have not materialized. Indian stocks as a whole enjoyed a quiet week in Mumbai, the country’s financial hub, and have remained largely stable since the Adani collapse. India’s main market index is nearly 2.5 percent higher than a year ago, even though US stocks are down more than 4 percent over the same period.

The fortitude is a testament to the size and apparent strength of the wider Indian business landscape. Adani took a spectacular fall after being accused of fraud and stock manipulation by a small New York trading firm, but the debacle is hardly a splash from the big Indian bucket. India is now home to about 1.5 million companies and a well-capitalized stock market: the National Stock Exchange fluctuated comfortably between $3 trillion and $3.5 trillion last year.

The resilience of the market has reinforced a reality that the rest of India’s business community would no doubt like to see more directly brought to the fore: that the Adani Group, a family-owned infrastructure and energy company, was in some ways alone.

The shortcomings identified by Adani’s critics – opaque structures, complicated by cross-ownership, perhaps even accounting bloat – can be found in other Indian companies, albeit on a much smaller scale. But many of India’s truly profitable companies are relative models of fairness, observers say, even in the go-go context of the Indian market.

Several are on a list maintained by Refinitiv, an international provider of market data, of the world’s best-run companies, including Infosys and Dr. Reddy’s Laboratories.

While Hindenburg Research, the New York investment firm, called the Adani Group “the biggest scammer in financial history,” it itself sounded optimistic about India, calling it “an emerging superpower with an exciting future.”

More directly, the country’s central bank, the Reserve Bank of India, signaled on Wednesday that it would continue business as usual, raising interest rates by a quarter of a point and leaving open the possibility of further hikes. That brought it into line with its major Western counterparts, which also make inflation containment a priority.

The initial concern, when the fallout from Hindenburg’s allegations forced the Adani Group to cancel a large February 1 stock offering, was that the plague of doubt would spread across India’s capital markets. Would Indian or foreign investors arbitrarily dump India’s stocks and bonds, suddenly afraid their value would fall too?

The reputation of India’s regulatory system has taken a hit and Prime Minister Narendra Modi has been questioned about his close ties to Adani Group founder Gautam Adani. But stocks of other companies, both in infrastructure and unrelated areas, are holding up. The silent side of Indian capitalism intends to keep spinning money wherever the pieces of the Adani Empire fall.

In the years since Mr Modi came to power, Mr Adani had loudly denounced his company as serving the Indian government, and when his conglomerate was attacked by Hindenburg, it staged a nationalist defense, accusing its naysayers of causing “anxiety for Indian citizens.”

However, the amalgamated nature of the Modi and Adani organizations is not typical of Indian capitalism in the 21st century. Saurabh Mukherjea, the founder of Mumbai-based Marcellus Investment Managers, said $1.5 trillion in value had been added to India’s public markets over the past decade, 80 percent of which came from just 20 companies.

Some of them, like Adani, make a lot of noise and flaunt their weight and political connections. But 90 percent are “clean, well-run franchises,” Mr Mukherjea said. The leaders of “the biggest, most consistent money-making machines keep their mouths shut and their heads under the parapet.”

The Indian public is often unfamiliar with, for example, the CEOs of companies like HDFC Bank or Asian Paints, who rarely embrace politicians.

Privately, some of the country’s business leaders feel pleased to see Mr. Adani get the credit they think he deserves. Not just for personal reasons – they think it’s good for corporate governance. India’s Supreme Court also said it saw room for improvement and ordered the government to answer questions on the matter on Friday.

In public, however, few will say much about Mr. Adani. His friends are still powerful, even if he is less.

Sanjay Reddy, the head of GVK, a rival infrastructure conglomerate that lost its most profitable airports to the Adani Group after a raid by federal agents, took to the air to deny a politician’s claim that the government had “hijacked” the airports for Adani “. (He made his remarks to NDTV, a news channel that regularly criticized the Modi government before Adani bought it last year.)

It is too early to say how far the Adani Group will fall, or how it will land. The catastrophic plunge in the share price of a conglomerate once valued at $220 billion came to a halt early this week, about midway to zero, as bargain hunters snapped up stocks at fire prices.

But Adani shares fell again later in the week; MSCI World, an influential index, decided on Friday to reduce some of the stock’s weighting, which in turn prompted investors to sell the shares.

Nathan Anderson, Hindenburg’s founder, tweeted that the company’s own work had been “validated” by the MCSI decision. In the weeks since Hindenburg accused Adani of financial misdeeds, some banks had refused to take Adani stock as collateral, and Moody’s on Friday downgraded its outlook on six Adani bonds to a status that left them barely investment-grade.

Others have cautiously defended Adani. The signals are still mixed: Norway’s sovereign wealth fund, for example, dumped its holdings in three Adani stocks at the same time Goldman Sachs rated Adani Ports, a subsidiary, as a “buy.”

Aswath Damodaran, professor of finance at New York University, wrote that even if the worst that has been said about Adani turns out to be true, it has not committed a “scam”. By taking on huge debt to boost its growth, Professor Damodaran wrote, Adani had taken “a risk, perhaps a poorly thought-out risk”, although not uncommon in the infrastructure sector, especially in a place like India, where investors expect strong growth.

One fear that became reality as the Adani group began its downfall was that its troubles might ripple through its lenders to harass other borrowers. But the books show that the debt is concentrated with lenders backed by the Indian state, mainly the Life Insurance Corporation of India and the State Bank of India, and foreign banks. Neither poses much of a risk of pain to ordinary citizens of India, but if the life insurer suffered billions in losses, it would squeeze the country’s budget deficit.

Yet there is a danger that Adani has secret sources of influence. If it were discovered to have had hidden loans through some of the shell companies Hindenburg investigated, that might help explain why it was trying to push its valuation to astronomical proportions.

If Adani went bankrupt — it’s not clear how likely that is to be a threat — his grand plans for building Modi’s infrastructure-and-solar vision would fail. Even then, key assets such as ports and power lines would retain value if taken over by creditors.

The jury may still be out on Adani, but the name itself has become a third track in Indian politics. During some rowdy annual sessions of parliament, the opposition loudly chanted “Modi-Adani, bhai-bhai” or “Modi-Adani, as brothers”.

The prime minister gave back as much as he could, at one point insulting an opponent’s surname – but never uttering Adani’s name.