Five Lessons To Learn From Adani Share Debacle

The brouhaha and stock market collapse of Adani group shares over the last few days has many lessons for regulators, promoters, conglomerates and the government.

But we need to get one point out of the way first: there is little doubt that Hindenburg, which released a damaging report on the Adani group's alleged frauds involving share price manipulations and other irregularities, is motivated.

Otherwise it would not have been timed to damage the Rs 20,000 crore follow-on public offer (FPO) of Adani Enterprises, which closes today (31 January 2023).

The FPO was intended to address the precise accusation that the group is overleveraged, and the attempt to spike the offer is thus intended to ensure that the group fails in its objective, though we will know about this only later in the day.

But there are lessons galore in this pow-pow between corporate power and agenda-driven hedge funds and short-sellers.

First, and foremost, corporate conglomerates should stop behaving like conglomerates, and treat each group company as a separate entity. The only linkage to the group should be the capital contribution of the holding company.

The minute the group becomes extended and gloriously opaque, it tends to over-leverage itself and makes itself vulnerable.

Hindenburg would not have succeeded in destroying so much stock market wealth in such little time if each Adani company was not so interlinked to group fortunes.

Second, no conglomerate can work without a cash-rich entity in the group. The Tatas, when they over-leveraged themselves 15 years ago by overpaying for their JLR and Corus Steel acquisitions, could stay afloat because they have huge cash inflows from Tata Consultancy Services.

The Ambanis could stay solvent while investing massive amounts in a bet called Reliance Jio only because the core refining and petrochemicals business was surplusing cash.

In the Adani case, even though their port operations are cash surplus, their investments in long-gestation infrastructure projects needed more equity, not debt. They may still manage to reduce debt in due course and deleverage, but they were essentially asking for trouble.

Third, politically-exposed corporate groups must consider themselves to be more vulnerable than the rest.

The Adanis, despite repeated denials from their end that they are treated preferentially by the Narendra Modi government, have not been able to shake off this association.

Other conglomerates must learn from this and avoid this political exposure, even if it is not true. They must distance themselves early from every government or political party.

Four, and this is for the regulators and government, it is important for them to remember who to protect and who not to. In the Adani case, the companies themselves must be ring-fenced from becoming collateral damage to the promoter group’s failings, assuming there were failings.

This implies that the regulatory agencies must probe the Hindenburg allegations, even while banks and financial institutions continue to support good businesses in the group, if necessary by appointing their own independent directors on Adani companies.

It is worth emphasising that most Adani group companies are in infrastructure, and hence worth keeping afloat.

Fifth, and this is not to do with the Adanis, but governments and central banks. When the latter opt for zero-interest or low-interest regimes in the name of maintaining growth, it will be tempting for any company or group to use leverage rather than equity to fund growth.

It is worth recalling that between 2008 and 2021, when the US Fed ran a near zero-interest regime, as did the European and Japanese central banks, credit was essentially as “free” as equity.

This is why companies, including zombie companies, stayed afloat by borrowing and funding deadbeat projects. They do not have any incentive to conserve capital and invest only in worthwhile projects.

It is no surprise that in the decade after 2008, Wall Street went through the roof despite doing all the damage in the previous decade of “irrational exuberance”.

The point: governments create moral hazards for companies by making capital unnecessarily cheap, and, in the process, they also promote technology that replaces labour rather than employing more labour.

In 2015, Swaminathan Anklesaria Aiyar wrote a column in The Times of India, titled, "Little sign of Modi cronyism in stock market trends".  He directly rebutted the claim that Adani benefited from being a Modi government crony. He attributed the rise in Adani shares then to the general exuberance of the market.

Today, it may be the case that Adani is slipping not because he is presumed to be a crony, but inspite of it.