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Explained: Why Adani Group Stocks Fell on Monday, and Why It Matters

Jun 15, 2021 3:05 PM 5 min read

To say Indian markets had an interesting Monday would be an understatement.

Following media reports that three foreign funds that owned over ₹43,500cr ($5.96bn) worth of shares in four Adani Group firms had been frozen, the stocks of all six of the conglomerate's listed companies climbed down, dragging down the broader market with them.

However, following the Group's forceful denunciation of the accusations, its individual stocks recuperated most of their losses (nonetheless, the shares ended the session $6bn lighter). For their part, Sensex and Nifty ended in the green.

All in all, the intraday day movement for Adani's stocks was more than 40%. Quite the rollercoaster ride!

What Caused this Mayhem?

An ET article alleged that the above-mentioned three Foreign Portfolio Investors (FPIs) - Albula Investment Fund, Cresta Fund and APMS Investment - had been frozen by the National Securities Depository Ltd. (NSDL) on May 31st.

The action was taken reportedly due to “insufficient disclosure of information regarding beneficial ownership as per the Prevention of Money Laundering Act (PMLA)”.

The report was followed immediately by a bloodbath in Adani shares, ending a year-long bull run. The Group’s market cap crashed by ₹1Lcr ($13.67bn) in a matter of hours and Gautam Adani’s net worth slipped by $7.6bn.


Escalation: The Sucheta Dalal Tweet

Furthermore, a June 12th tweet by business journalist Sucheta Dalal (of Harshad Mehta and Scam 1992 fame) made the rounds again and fanned the flames.

Dalal had alleged a “scandal” involving possible rigging of stock prices in favour of "one group" through "foreign entities". While no company was named, the Twitter verse inferred this allegation to be against the Adani Group, possibly adding to the market bloodbath in a Musk-esque escalation.


Action and Reaction

Soon, the Adani Group, in separate filings to exchanges, denied the charges, calling them “blatantly erroneous and … done to deliberately mislead the investing community” (full release here).

An email correspondence between NSDL and the Adani Group soon came to light where the former says, “The status of demat accounts mentioned in your trail email are held in “active” status in [the] NSDL system.”


So… Are the Accounts Frozen or Not?

That’s the billion-dollar question...and there isn’t a straight answer.

Well into Tuesday afternoon, the NSDL website still showed the three funds’ accounts as frozen. But as the email correspondence shows, the funds aren’t frozen. So, which is it?

FPIs are required to maintain seperate accounts for local trading and offshore instruments. As of today, the domestic trading accounts of the three Adani-linked funds in question remain active. But their account for offshore instruments like depository receipts may have been frozen - reportedly on account of a 2016 SEBI case against fraudulent activity in some FPIs.

(Corroboration of these details is difficult since freeze order information is not available in the public domain.) 


The Morning After

As of market close today, Adani companies traded unenthusiastically even whilst paring most of Monday’s heavy losses. Only Adani Enterprises ended the session in green.

Further clarifications from SEBI, NSDL, ET and the Adani Group may be incoming. But yesterday’s developments come at a particularly inopportune time for the Group as it prepares for possibly two new IPOs - Adani Wilmar and Adani Airports. And regardless of how this story plays out in the coming days, the spotlight is once again on the Group's unorthodox shareholding structure.


All Eggs in Adani’s Basket

There are two additional concerns.

First is the concerned Adani Group companies’ low free float. Free float is the percentage of shares outstanding “freely available” to be traded on the secondary market. Considering these FPIs have been holding the stock for more than decade, shares which would technically be considered as “free” are actually not, thereby putting a dampener on overall liquidity.

Moreover, these foreign funds hold over 95% of their entire portfolio investments within Adani companies. Talk about diversification! In fact, four Mauritius-based funds in particular - the three in question and Elara India Opportunities Fund - have between 94.67% and 98% of their holdings solely in Adani stocks.

The Group argues that these funds have been investors for more than a decade and that their ownership in multiple companies is a result of subsequent demergers. But such a gross concentration of investments by an FPI in one conglomerate alone is unnatural, harmful and just suspicious.


All Said and Done...

Within its corporate structure, the Group has many complicated inter-linkages that enable money raised for growth to circulate between companies through “related party transactions”.

This incestuous interdependence runs deep. The Group companies buy each other's shares, fund each other's expansions and purchase each other's equity.

Granted, such a meandering arrangement can be a move to rapidly grow and increase management control. But such practices can also stifle flexibility and create a situation where one troubled entity ends up affecting all the others in the domino chain.

These are important issues not just for the Ahmedabad-headquartered conglomerate but also for the broader market.


The Importance of Being Adani

In recent years, the Adani companies have become almost omnipresent within India’s infrastructure value chain. From logistics, airports, roads and railways to energy, mining, defence and aerospace, Adani boasts a very diverse business portfolio, also including real estate, agri, financial services and even data centers.

With operations spread across 70 locations in 50 countries, the Adani Group companies generate an annual revenue of roughly $15bn. Among the six listed entities, no less than three have a market cap above ₹1Lcr ($13.7bn). All in all, the Group’s market cap was ₹9.5Lcr (~$130bn) as of Friday.

Another measure of significance can be the companies’ stellar stock market performance - its shares have consistently outperformed the broader index the past year. In particular, Adani Enterprises and Adani Transmission have soared YoY by a staggering 972% and 669% respectively.

This surge has translated into booming fortunes for Gautam Adani, enabling him to become the second-richest man in Asia. It has also elicited a SEBI investigation into accusations of price manipulation.

Monday’s developments may inspire louder calls for corporate transparency. They may also motivate regulators to put more financial information in the public domain for more oversight and transparency. Or, if all allegations are proven false, a defamation suit may be knocking on ET’s doors.


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