Discover more from Diane Francis
February 16, 2023
The world’s highest profile billionaires haven’t exactly had a bullish year. Staggering losses have been deservedly sustained by Russia’s odious oligarchs, but also by greedy crypto tycoons, Elon Musk and a few other Big Tech proprietors. But the biggest “loser” by far has been India’s infrastructure king, Gautam Adani, whose companies collapsed in value by $123 billion since January 24. His stock prices fell following a report by U.S.-based investment research firm Hindenburg Research that alleged Adani had used anonymous entities in an offshore tax haven to manipulate stock markets. Adani has forcefully denied all allegations and issued an exhaustive 413-page legal rebuttal, but shareholders dumped shares and remain skeptical. Until then, Adani was the richest person in India, the richest person in Asia, and the third wealthiest man in the world.
The Adani affair negatively impacts India’s reputation due to the scale of his holdings, his links to its current Prime Minister Narendra Modi as well as the importance of his companies in creating the modern infrastructure upon which the world’s biggest democracy prospers. He was dubbed “Modi’s Rockefeller”, but the stock setback has hurt the reputation of both men and called into question the integrity of India’s stock market regulatory system. Adani in interviews called the allegations “baseless and discredited” and said he’s received no personal or business favors from Modi. But despite his company’s rebuttal has failed to end the slide or controversy. Recently, the country’s opposition parties called for a Supreme Court probe into his business history and there are street protests.
His career has been meteoric. A college drop-out, Adani left his father’s textile business and became a financial “engineer”, accessing gobs of debt to create a highly-leveraged conglomerate out of a modest agri-trading firm in the 1980s. By 2022, his empire had $23 billion in annual revenues and owned ports, airports, coal mines in Australia, power plants, and utilities spread across seven Adani companies listed on India’s stock exchanges. The Adani Group is also heavily invested in green energy, cement, media, data centers, real estate, and recently bought Israel’s Haifa port.
But since the January allegations the conglomerate has scrambled to prune operations and reduce debts. The American short-selling research outfit said its allegations were based on a two-year investigation and stated that the Adani Group “engaged in a brazen stock manipulation and accounting fraud scheme over the course of decades”. It said that Gautam Adani used a web of shell companies, mostly registered in Mauritius, a former French colony and island in the India Ocean with a population of 1.2 million people and untold numbers of shell companies with billions in assets. It's the go-to offshore haven for tycoons in Southeast Asia, Indonesia, and India. Hindenburg’s allegations, denied and unproven, triggered a $123-billion sell-off and a cascade of lowered credit ratings for Adani’s corporations.
Mauritius said there were no breaches of any laws in its jurisdiction by Adani, but Indian opposition politicians demand a full-scale investigation into the companies as well as their relationships with government officials. “They have called for a Joint Parliamentary Committee or a Supreme Court-monitored panel to be set up to investigate the allegations against the firm and the risk to Indian investors from the fall in Adani company shares,” reported BBC. “The group has dismissed the allegations as malicious and untrue, calling them an `attack on India’.”
This blow may interrupt, perhaps temporarily, India’s trajectory towards becoming an economic superpower. Modi assumes the G20 Presidency this year and its economy booms. India’s GDP of $3.8 trillion places it in the Big Five, behind the United States, China, Japan, and Germany. By 2030, based on current growth rates, India will be the world’s third largest economy with a GDP of $5 trillion — larger than Japan’s or Germany’s. And by 2050, it will overtake China and be second in size only to the United States.
But Adani’s dramatic downturn, even if “baseless” as he submits, is another example of the problems caused by widespread use of offshore entities and financial secrecy techniques. These practices plague capitalist nation-states, tax officials, and stock market regulators. Policing is impossible and complicated. Transactions can be hidden and this should be illegal. This is not the first stock market scandal involving such practices. The first was Enron Corp., America’s biggest bankruptcy in 2004. Its demise followed claims, which were eventually proven and/or admitted, that its executives used fraudulent accounting practices in offshore havens to inflate revenues and hide debt in secret subsidiaries. The result was that one major accounting firm went bust and the Securities and Exchange Commission, credit rating agencies, and investment banks were accused of negligence for enabling the scam.
Another example of offshore problems, and secrecy abuses, is the gigantic crash in November of crypto exchanges FTX and FTX.US, which led to the collapse in the value of most cryptocurrencies such as Ethereum and Bitcoin. Its operations were headquartered offshore in secrecy haven Nassau for years, but it suddenly filed bankruptcy after racking up $50 billion in liabilities. Its American founder, Sam Bankman-Fried, has cooperated with authorities and returned stateside to prove his innocence. But he faces up to 115 years in prison if it’s proven he lied to investors and took billions of dollars of customers’ money for his own personal use. In one of my November newsletters, entitled “Beware Geeks Bearing Gifts”, I describe the details of that scandal.
Offshore holdings and anonymous entities are commonly and legally used by legitimate companies and individuals too. But, in Adani’s situation, the disclosure of offshore trading was enough to sink his stock and is why investors, regulators, and governments everywhere must demand corporate transparency in all business affairs. The Adani incident has harmed the world’s largest and fastest-growing democracy and also highlights the dangers of its excessive concentration of economic ownership. India’s regulators must demonstrate that they did, and will, impose sufficient scrutiny on markets going forward. Another meltdown of this scale could be disastrous, causing political instability in India and geopolitical instability in Asia and beyond.