Why Did Adani Stocks Fall Today?

The US has opened a can of worms for the Adani Group. On Wednesday, federal prosecutors accused the conglomerate's chair, Gautam Adani, and several others of fraud by offering some $265 million in bribes to Indian government officials to secure solar-power deals. The consequences of the indictment will be more far-reaching than those induced by short-seller Hindenburg Research in early 2023. And the tycoon's unusually tight ownership of the empire he built complicates matters.

The Immediate Problem: Funding

The most immediate problem Adani's 10 or so listed companies will face is funding, including potentially for refinancing some of their $29 billion of total borrowings. Adani Green Energy, which is at the center of the new allegations, already on Thursday pulled a $600 million bond issue that had only just been priced hours earlier. Adani stocks plummeted up to 23% on Thursday. The group said the allegations against its directors were baseless and denied them.

Historical Context: The Short-Seller Attack

The short-seller attack almost two years ago similarly led its flagship company, Adani Enterprises, to abort a capital raise, and briefly turned off other financing spigots. Funding trickled back: within a month Piyush Gupta, CEO of Singapore's DBS Group, came to Adani's defense, arguing the financial risk of making secured loans to the conglomerate was acceptable. And a handful of global investors, including Abu Dhabi-based International Holding Company, struck some private deals. But it took longer for Western lenders like Deutsche Bank and Barclays to warm back up; and the first equity market transaction only occurred in July this year, when Adani Energy Solutions sold $1 billion of new stock.

The Fraud (Bribery) Indictment

A fraud (bribery) indictment from New York-based prosecutors at the Department of Justice, as well as civil charges from the U.S. Securities and Exchange Commission, is more concerning. It will be harder for bankers like Gupta to fob that off as quickly as a short seller's accusations. And all else being equal, any financial institutions based, registered, traded, or wanting to do business in the United States may be leery of engaging with Adani companies until the U.S. Department of Justice and SEC cases are resolved.

Global Implications

There's also a danger that governments of other countries where Adani's businesses operate get involved in the current investigations or start their own. The conglomerate runs a coal-mining business in Australia, is invested in ports in Israel and Sri Lanka, and recently proposed a lease to run the main airport in Kenya.

Key Man Risk

Usually, the obvious way for a company to limit the damage of such probes is to part ways with the executives and board members concerned as soon as possible. Indeed, the SEC complaint seeks to bar Adani and the others from being officers and directors.

Trouble is, Gautam Adani and his family own nearly 70% of the group's listed units. So even if he ceases to have an official role in the empire he built, or temporarily steps back, the patriarch will still be able to exercise his influence over decisions—and one of his relatives is likely to be his successor. His key man risk is particularly hard to contain.

Context and News

U.S. Prosecutors' Charges: On November 20, U.S. prosecutors charged Gautam Adani, chair of the Indian conglomerate Adani Group, with committing securities and wire fraud between 2020 and 2024. They allege that Gautam Adani and seven other defendants, including his nephew Sagar Adani, agreed to pay some $265 million in bribes to Indian government officials to win solar-power contracts expected to generate around $2 billion in profit over 20 years for Adani Green Energy.

SEC Charges: Gautam and Sagar Adani have also been charged by the U.S. Securities and Exchange Commission in relation to the alleged scheme. The regulator accuses them of engaging in the fraud while raising $175 million from U.S. investors as part of a $750 million bond offering by Adani Green in September 2021.

Adani Group's Response: The Adani Group denied the allegations, stating that they are baseless. The group emphasized its commitment to maintaining the highest standards of governance, transparency, and regulatory compliance across all jurisdictions of its operations.

Market Impact

Massive Market Cap Loss: The sharp selloff in the group's stocks wiped out approximately ₹2.24 lakh crore from the Adani Group's overall market capitalization (m-cap). According to Capital Market data, the group's total market capitalization declined to nearly ₹12.43 lakh crore, down from ₹14.31 lakh crore in the previous session.

Adani Group stocks & their fall today (21st Nov 2024)

• Adani Enterprises -22.60%

• Adani Ports -13.56%

• Adani Power -9.14%

• Adani Energy Solutions -20%

• Adani Green -18.90%

• Adani Wilmar -10%

• NDTV -0.66%

• Ambuja Cements -11.90%

• ACC -7.25%

Bond Cancellation: Adani Green cancelled plans to raise $600 million in bonds, Reuters reported, hours after it had been priced. The group’s existing U.S.-currency notes plunged in Asian trading.

Historical Context: Last year in January, a U.S.-based short-seller, Hindenburg Research, accused the Adani Group of using offshore tax havens improperly. The report triggered a sharp selloff in Adani Group stocks, causing an approximately $150 billion outflow in the group stocks.

GQG Partners Reactions

• GQG Partners: GQG Partners, an investor in Adani Group companies, is monitoring charges against Gautam Adani and Adani Group executives in the bribery case. GQG Partners has investments in Adani Green Energy, which in the past raised more than $175 million in the U.S. and is facing charges regarding paying bribes to Indian officials.

• Stock Price Impact: Shares of Australia-listed fund manager GQG Partners nosedived 20% on Thursday, November 21, after media reports indicated the firm was reviewing its investments in India’s Adani Group. GQG Partners’ stock price dropped by as much as 23.1%, hitting a low of AUD 2.03, its lowest level since mid-March. The stock was last down about 22%, marking the company's worst trading day on record.

Adani Group's Exposure

• GQG Partners' Holdings: According to LSEG data, GQG Partners holds a combined stake of 19.37% in multiple Adani Group companies, including Adani Enterprises, Adani Power, Adani Green Energy, and Adani Energy Solutions. The firm’s exposure to these companies has raised concerns, prompting a review of its investment strategy.

• Mutual Fund Holdings in Adani Group

As of October 31, 2024, Indian mutual funds collectively held ₹43,455 crore worth of shares in 10 listed companies of the Adani Group. This section provides a detailed breakdown of these holdings, highlighting the exposure of various mutual fund schemes to Adani Group companies.

Adani Stocks held by Mutual Funds (Total Holdings):

Detailed Breakdown by Mutual Fund Schemes

Highest Net Exposures:

• Quant ELSS Tax Saver Fund: 7.60% exposure in Adani Power, valued at ₹834.74 crore.

• Mirae Asset Nifty Metal ETF and ICICI Prudential Nifty Metal ETF: 10.58% assets each invested in Adani Enterprises.

• PGIM India Arbitrage Fund: 6.97% of its assets invested in Ambuja Cements.

• UTI Transportation and Logistics Fund: 5.02% of its assets invested in Ambuja Cements.

Conclusion

The Adani Group's recent legal troubles have sent shockwaves through the financial markets, leading to significant losses in market capitalization and investor confidence. The group's denial of the allegations and commitment to transparency will be crucial in navigating this challenging period. As the situation unfolds, investors and stakeholders will be closely monitoring developments and assessing the long-term impact on the conglomerate's financial health and market position.

Disclaimer: This content is for information purposes only. We advise investors to consult certified experts before making any investment decisions. Source: Reuters | MoneyControl | Mint | Economic Times | Business Today | Other Publicly Available Sources.