The Adani Special Issue #38
The story so far: #Stockmarketcrash trends on Twitter as Adani stocks continue to fall after Hindenburg claims the group of market manipulation and accounting fraud
The Big Picture
When last week began, we planned to pick up Green Bonds for a closer look. Not any more. The big story last week and almost certainly, in the coming week — is Adani.
You know the backstory by now. On 25 January, Hindenburg Research, a US-based short-selling firm with the scalps of firms like electric vehicle startup Nikola, released a damning report on the Adani Group -- accusing it of serious malfeasances like the use of offshore investment funds and tainted brokers to boost both share prices and group earnings -- and announced it was shorting the group’s US-traded bonds and “non-Indian-traded derivatives, along with other non-Indian-traded reference securities”.
As this newsletter gets written, the future of Adani hangs very much in the balance. The group is financially fragile. It has used debt not just to expand – but also to prop up struggling parts of its empire. To raise large sums of debt, it has inflated the price of its shares by getting a clutch of investment funds in Mauritius and elsewhere to pick up most of the free float. Thereafter, this cash has sloshed around the group through its web of close to 600 subsidiaries in India and elsewhere (including a bunch of opaque tax havens).
This stuff, already described by reporters in the financial press, now gets a far more detailed treatment in the Hindenburg Research. This is a business which needs constant infusions of capital to stay afloat. Our long-reads section will get into more detail on this.
For now, a different point — on what the report implies for the group. Unsure how global markets would respond to the report, Indian bourses hammered Adani. By the time markets closed on Friday, the group’s market cap was down 400,000 crore – about 20% gone. That, however, is not the bigger story. Hindenburg is shorting Adani’s bonds – and Adani now does most of its borrowings via international bonds. As Gautam Adani told India Today last December: “Almost 50% of our borrowing is now through international bonds.”
The implications are yet to reveal themselves. Friday evening, Adani’s international bonds had fallen to 77 cents to the dollar. Even as the group scrambled to raise new funds to stem the bleed, the start of this week saw the prices of Adani's bonds nosedive by up to another 10%. If the fall continues – more accurately, if the market reprices the bonds lower than they are now – Adani’s future bond issues will find fewer takers. Alternatively, it will have to pay higher interest to attract investors. Either way, it will find itself more constrained for money. The implications – for an "NPA trapeze artist", as Subramaniam Swamy described Adani – can be dire.
For the energy and clean tech sectors, the repercussions could be massive. Adani Green Energy, Adani Power and Adani Transmission, all feature prominently in Hindenburg's takedown.
This is a time to wait and watch. The bigger implications run deep. Not only is Adani a key player in both India’s coal and renewables sector, the government has also dragooned him into energy transition fronts like Green Hydrogen, solar-panel manufacturing, pumped storage and more. More than that, he is also a key pillar for the ruling party. See Adam Tooze's essay on this further down.
Exciting times, to say the least.
A reading list on Adani
From 2013, a profile of Adani when he was still in Gujarat.
From 2019, a look at how Adani has financed his quicksilver expansion. (This talks about how debt, raised by pledging shares, was used inside the group).
On the investment funds which invested in his group. Also see this FT report about them. (These talk about how shares’ values were inflated before pledging).
In its report, Hindenburg has added layers (and layers) to our understanding of how Adani works. This was followed by a rebuttal from the company late on Sunday night. By Monday morning, Hindenburg had released its own response. Read all three documents and you will have a fairly decent sense of how the group finances its operations. Also read this NYMAG profile on Nathan Anderson, the founder of Hindenburg.
And now, the bigger picture. ET’s consulting editor, TK Arun, places Adani in the larger context of political corruption in India.
A long time ago, Harvard professor Michael Walton had ascribed Adani’s rise to what he called “the rent sharing model”. Here, political leaders favour one company so much that it makes super-normal profits – which are then shared with the politician. What does Hindenburg mean for his arrangement with Modi, asks historian Adam Tooze.
And finally, since some corroboration is always good, Sunday’s Hindu BusinessLine took a closer look at the financials of Adani Enterprises. It steers clear of Hindenburg’s report but finds over-valuation all the same.
And here is The Ken, outlining what the controversy means for Adani’s expansion plans.
News of the week
Joshimath is slowly receding from the national consciousness.
But, before that happens, the Swadeshi Jagran Manch, the economic think-tank of the RSS, has demanded the government declare all of the Himalayas as an eco-sensitive zone. “The SJM has also cited the Char Dham highway project and NTPC tunnel in Uttarakhand as reasons behind the land subsidence and sliding in Joshimath,” reported Indian Express. “The SJM has demanded that the Char Dham road-widening project be limited to a certain width and that the government reconsider the Char Dham rail project.”
It will be a little surprise if these demands fail to condense into any meaningful shift in the government's vision for the Himalayas. The government humours bodies like the SJM – we saw that with PLI as well – but remains non-committal to any suggestions from these quarters.
While on Joshimath, though, listen to more staunch – and consistent -- defenders of the hills like Himanshu Thakkar. He has a piece about Tapovan Vishnugad, the NTPC project at the heart of the Joshimath crisis, in the latest issue of Frontline.
Turning to other developments, there is concern that 2023 might be hotter than last year.
Our policy response continues to be incoherent, however.
On the one hand, Telangana is getting another pumped storage project. India wants to commission at least 20 nuclear power plants by 2031, according to a December Lok Sabha reply. The country is also working on a policy to classify economic activities and technologies into sustainable and non-sustainable categories to help investors looking for green projects – think of this as an Indian equivalent of the EU’s green taxonomy.
And yet, this week also came news about the further weakening of environmental law — for Gati Shakti projects, this time around. Illegal coal mining continues, with government blessings, in Meghalaya. A new oil pipeline has been mooted, even though it will cut through a forest in Assam. There was limited demand for green bonds – and government-owned firms bought half of them.
In other news, Pakistan saw a giant power outage. According to some reports, the blackout stemmed from an energy-saving measure to reduce power Sunday night, which made it more difficult to restart the system Monday morning. Pakistan, as we saw through last year, is struggling with high debt and energy costs. It has finally bitten the bullet and pushed through a huge hike in petrol and diesel costs. It isn’t the only country struggling. Power grids are also collapsing in South Africa, even as US Treasury Secretary Janet Yellen touted the country's Just Energy Transition Partnership (JET-P) deal during a visit to the nation.
Other processes continued apace. Through last year, the world has been digging defensive trenches around the technologies of the future. And so, last week, came the news that China is considering measures to slow the growth of solar manufacturing in other countries. “Chinese firms have spent the past decade developing cutting-edge technology to produce bigger, thinner wafers that have played a big part in reducing the cost of solar power by more than 90%,” wrote Bloomberg. “If foreign manufacturers have to use older wafers, it will diminish the cost competitiveness of their panels,” its report says.
Indonesia continues to embrace resource nationalism as well, wanting to become a global supplier of EV batteries. As is Bolivia – with its lithium plans.
Turning to South America, there is more information on what Lula is doing to combat deforestation in the Amazon – as per reports, a third of it is dying. He has brought Marina Silva back; revoked mining permissions, created a ministry of indigenous people, and taken steps to strengthen the Amazon Fund. There is also happy news from Portugal. It will swap Cape Verde’s debt for environmental investment – a debt-for-nature swap!
Other news. Mexico announced a set of measures to ban solar geoengineering experiments in the country, after a US startup began releasing sulfur particles into the atmosphere in the northern state of Baja California. The report calls cynical carbon offsets to mind.
The startup wasn’t conducting scientific research. “Making Sunsets is already selling “cooling credits” for future balloon flights with larger amounts of sulphur dioxide for $10 each,” writes Climate Change News. Making Sunsets’ website, it adds, says: “Your funds will be used to release at least 1 gram of our ‘clouds’ into the stratosphere on your behalf, offsetting the warming effect of 1 ton of carbon dioxide for 1 year.”
Climate Longreads
Indian Express has a poignant long-read on what happened to the great forests of Hazaribagh.
The world already has all the technology it needs to save itself, says academic Mark Jacobson. It doesn’t need miracle technologies.
Britishvolt: how Britain’s big battery hope ran out of charge
An allegedly ill-conceived river interlinking government project has sidelined an equally controversial diamond mining project in Madhya Pradesh. Ken Betwa trumps Birla’s diamond mining plans.
Indian banks ill-prepared to handle challenges of clean energy transition.
An EV in Every Driveway Is an Environmental Disaster – we do not want to replace one extractive industry with another.
How just 25 oil companies are set to blow the world’s 1.5°C carbon budget
Primacy and absence of climate change: On competing political imaginaries and the need for a deeper interrogation of climate change narratives in Bangladesh. This is by Kasia Poprocki, whose book on the global politics of climate change adaptation in Bangladesh has to be read.
Plucky idea: the feather library providing a visual A to Z of India’s birds
Book of the week
Given Adani-Hindenburg, this week’s book pick is about an energy giant which cooked its books, went well-hyped by the press and unchallenged by regulators, and then got shorted. This is The Smartest Kids In The Room: The Amazing Rise and Scandalous Fall of Enron, by Bethany McLean and Peter Elkind. The book is financial journalism at its best – meticulously reconstructing the trades instead of just focusing on descriptions and anecdotes. A real must-read.