The group has sought to dismiss the allegations and suggested that this was an attack not only on the group but also on the Indian success story. But that doesn’t seem to have convinced private creditors and investors Photo credit: AFP
A Adani Group attacked by short-seller by US-based Hindenburg Research has led to the exposure of gautam adani story, which celebrated the stupendous rise in wealth of a man and his business empire, in a very short span of time. Much of that money disappeared after a collapse in stock prices that wiped more than $100 billion off the market capitalization of seven publicly listed Adani group companies. because of which $2.5 billion share issue exit, post-launch And, possibly, a round of borrowing.
meteoric rise, capital-intensive projects
After those events, attention turned to what this episode says about the larger Indian growth story. two characteristics of adani story There is importance here. The first is that the gravity-defying climb in the market value of listed companies was accompanied by an expansion of the conglomerates’ material assets, which, in a short period of time, displaced the well-established business conglomerates that dominated India’s corporate sector. Such a rise had happened only once before, with the Dhirubhai Ambani-led Reliance Group. As in that case too, the current leaders could not prevent the meteoric rise of a ‘upstart’ group.
The second is that the Adani Group’s growth has come largely through investments in capital-intensive infrastructure sectors – power generation, ports, airports and roads, as well as mining and metals. Until an era defined by the Indian government’s embrace of neoliberalism, these areas were largely under the patronage of the public sector. This was not only because private entry was restricted by policy, but also because even when such restrictions were being relaxed, private investment lagged behind. One reason was that these sectors required larger investments, involved longer development times, and were, therefore, more risky. Secondly, the pricing policy of government and public enterprises in many of these areas was such that when profits were made, the projects were less profitable than elsewhere.
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For example, the rise of dominance in these sectors was not the same as entering the provision of offshore software services. It was this sector that in the not too distant past gave high returns and rapid growth in the market valuation of companies that made their promoters India’s new billionaires. Infrastructure requires large outlays, and the rewards, even when positive, are limited. Entrants in infrastructure sectors need to risk large amounts of capital, only a small fraction of which can flow from a new entrepreneur’s own coffers. Gautam Adani not only invested in multiple such projects in any one infrastructure sector, but also in greenfield projects or acquisitions to build up large asset stocks across multiple sectors. His genius lay in his ability to muster the necessary resources for this almost impossible task.
favorable factors
While climbing that hill, Mr. Adani undoubtedly favored the features of India’s neoliberal policy regime after the turn of the century, which boosted GDP growth to nearly 8% per annum from 2003-04 to 2011-12. One was India’s success, especially after 2003, in using liberalization to attract large inflows of foreign financial capital into its bond and equity markets. The resulting surge in domestic liquidity boosted deposits in India’s banking system and set off a credit boom.
Banks had to resort to aggressive lending practices to expand their loan base which took them into new sectors including infrastructure, which were earlier considered very risky. This shift was encouraged by conflicting elements of the neoliberal development strategy. On the one hand, the government focused on building the necessary infrastructure to support the private sector-led development strategy.
On the other hand, it was committed to encouraging the private sector with tax concessions as well as a move towards fiscal conservatism that eliminated debt-financed spending. To ensure both, spending, including public investment, has to be reined in. This raised the question of which actors would invest in infrastructure since, until then, the private sector had largely shied away from that domain. To solve this conundrum, the neoliberal state opted to get the private sector to do the work, mobilize the necessary resources as well as provide support to reduce the ‘risk’ and improve the profitability of such investments. Attracted it by promising. Subsidies from exchequer and ‘viability gap funding’ and flexible pricing were examples of such support. An important component of that agenda was the provision of large amounts of credit from the public banking system, which was flush with liquidity for private sector firms investing in infrastructure sectors.
The flood of reports (some of which contain solid data) that followed the Hindenburg hit show that the Adani group benefited disproportionately from these features of the neoliberal policy regime. It borrowed heavily from public sector banks as well as equity funding from public financial institutions such as Life Insurance Corporation of India, to establish a presence in infrastructure sectors in a short span of time. The benefits didn’t stop there. Evidence suggests that official permissions, easy environmental clearances, access to land and facilitative policies, combined to drive Adani’s expansion, convey a perception that the group was too important not to succeed. It was inevitable that this special treatment, contributing to the conglomerate’s top run, would be attributed to conglomerate-founder Gautam Adani’s closeness to Prime Minister Narendra Modi. The ideological case for encouraging the private sector may, after all, provide an excuse to excessively favor one or more private players, for whatever reason. Contrary to the rhetoric of neoliberal advocates, embracing markets does not increase transparency and reduce partisanship.
regulatory restraint
In fact, rumors of state patronage probably encouraged foreign bond and equity investors to buy into Adani in search of higher returns whenever the opportunity presented itself. But, possibly influenced by the need to retain control of a capital-hungry business, Adani has preferred debt, with free floating shares available for trading in its listed companies being a tiny fraction of the total. To garner that credit, Hindenburg argues, and many others agree, the group used related-party shell companies claiming to be independent to park finances in tax havens overseas, which were then used by Adani firms. Used to acquire the shares of This helped propel share prices to undetectable levels, but, despite red flags from multiple sources, there was no investigation by Indian regulators into Adani firms, foreign investors or banks investing in and lending to the companies. State support was combined with regulatory forbearance. The resulting rising share prices served in more ways than boosting Gautam Adani’s wealth status. They helped raise large amounts of loans from domestic and foreign financial firms by pledging overvalued shares as collateral. Finance did not seem to be an obstacle that could prevent the expansion of the group. Until the Hindenburg came along.
The Adani group tried to dismiss the short seller’s allegations and said it was an attack on the Indian success story, not just the group. But this does not seem to have convinced private creditors and investors. Share prices fell due to margin calls from those holding the inflated value shares as collateral. Thus far, Adani is opting for early repayment of loans totaling $1.1 billion and releasing some pledged shares of group companies. But the story being told is not yet complete. However, it has already made it clear that neoliberalism is not about market competition and transparency, but a means of engineered income and wealth redistribution. In this case on the side of an individual and his group.
CP Chandrasekhar is former Professor, Jawaharlal Nehru University and Senior Research Fellow, Perry UMass Amherst