Editorial: Billion-dollar bubble bursts

NEW DELHI: The expose by Hindenburg Research on the Adani Group’s “brazen stock manipulation and accounting fraud” throws up a welter of questions regarding corporate governance and policing in this country. Indeed, it indicates yet again that regulatory laxity has lodged itself in the DNA of our capital markets.

But first, a point in total agreement with the bhakts who dismiss the Hindenburg report as ‘nothing new’. It brings out no new facts that weren’t already known. The trail of red flags related to the Adani's goes back at least 15 years. As long ago as in 2007, the Securities Exchange Board of India (SEBI) had stated that the Adani's aided and abetted in manipulating stock prices. But as usual, the saffron laity fail to ask follow-up questions in their own line of inquiry: If every misdeed pointed out in the Hindenburg report was known to India’s regulatory agencies, why wasn’t anything done about it? The stock price inflation by Adani companies, or the source of their high valuations, was not even a case of hiding in plain sight. Analysts routinely steered clear of trying to explain the crazy valuations. Eighteen months ago, an online long-form business news portal reported the ‘confounding rise and rise of Adani stocks’ on the back of investments by offshore funds. Bloomberg found that these offshore funds put 95% of their monies into Adani companies. Diversifying one’s bets is the first principle of hedge funds; no self-respecting fund manager would put all his eggs into one basket.

Last year, a Fitch subsidiary reported the Adani group companies were “deeply over-leveraged” and suggested it could unravel the Adanis’ vast empire as their businesses did not seem to have the revenues to repay loans. That did not stop PSBs from continuing to lend to the Adanis as they went about their audacious expansion, buying up ports, airports, cement and media companies in a dizzying shopping spree. Analyst estimates are that the Adani group companies have an aggregate external debt of Rs 1.9 lakh crore, the bulk of it from public sector banks. It’s no wonder that the stock market bloodbath of Adani companies last week wiped out more than 10 per cent of the market cap of some of the biggest PSU banks and LIC as well.

Despite the panic in the capital markets, the Adanis have said they will continue with their Rs 20,000 crore follow-on public offer (FPO). The self-same public sector entities LIC and SBI are institutional investors in the FPO. It’s understandable why the Adanis would proceed with the FPO. After all, the FPO was a gambit to ease themselves of their debt burden and transfer it to shareholders, which explains the frenetic valuation bubble they have been blowing into for months. This follows the template set in 2021-22 by several startup ‘unicorns’ like Paytm, Nykaa and Policy Bazaar which off-loaded insanely expensive chunks of stock to unwary individual investors and laughed all the way to the bank as their share values tanked up to 70 per cent in the months following.

This is a cruel joke on the people of India. Public money is used to inflate these bubbles, which are then foisted on the public just before they blow up. But the joke gets even more macabre when such poor corporate regulation and governance scares off foreign direct investment, which India badly needs to build infrastructure and create jobs. And we exacerbate this regulatory betrayal by misusing watch dogs such as SEBI, ED, DRI, IT as instruments of harassment rather than law enforcement.