Holding structure

Regulator should look into allegations against Adani Enterprises

The follow-on public offering (FPO) of Adani Enterprises was fully subscribed on the last day with the group managing to persuade institutional investors and high networth individuals to pick up the slack in the Rs 20,000-crore issue. The institutional quota was subscribed 1.26 times and HNIs 3.32 times, which was enough to cover for the fact that only 12 per cent of the retail quota was picked up, and even the employee quota was subscribed at 55 per cent. The issue ran into trouble, of course, because the Hindenburg Research report accused the “World’s 3rd Richest Man” of “pulling the largest con in corporate history”. The 106-page report alleged extensive evidence of financial manipulation, including money being moved around via a network of overseas shell companies controlled by Vinod Adani, brother of Adani Enterprises Chairman Gautam Adani. The report asked 88 questions about the group’s financial structure, and pointed to ongoing and past investigations, including those of its individual promoters and their associates by the regulator. It also pointed out there was very little free float in most listed Adani group companies and alleged that much of that free float was owned by Mauritius-based foreign portfolio investors (FPIs), which had opaque ownership structures and may be controlled by friends of the promoters or family members.

Several Adani companies are indeed very closely held, with promoters holding close to the threshold of 75 per cent, above which regulations require delisting. While the group responded to the allegations, share prices plummeted in listed Adani stocks and their overseas bonds. On the face of it, subscribing to the FPO made little sense since the offer price band of Rs 3,112-3,276 was at a premium to share price in the secondary market. Even after a sharp price recovery, Adani Enterprises trades at Rs 2,975 — a significant discount to the offer-price band. Given full subscription, the group can go ahead with its green hydrogen plans and pay down debt as it intended. However, it is a telling point that Indian mutual funds and retail investors stayed away, and, indeed, domestic mutual funds own very little stake.

There is also very little institutional coverage or analysis of Adani companies. The stocks are owned only by a few FPIs, which appear to have invested in almost nothing outside the Adani group. This is all highly unusual, given that the group companies are included in market indices, and the group is a big player across critical infrastructure segments like ports, power, airports, gas, and cement, and recently showed an interest in telecom. The lack of coverage, and low mutual-fund and retail ownership, does indicate possible lack of confidence. Some of the group’s responses to the accusations made by Hindenburg also do not seem very convincing. For example, the group stated Mr Vinod Adani was not an associated party, which he is by definition under Indian law. In the interests of transparency, the regulator should be looking suo motu into some of the more detailed allegations. For instance, the regulator can make inquiries about the beneficial ownership of the FPIs that are heavily invested in Adani stocks, and about the web of companies alleged to have undisclosed related-party transactions. It should also accelerate any ongoing investigations involving the group or its senior officers.