Adani’s fate matters for the Indian economy and ordinary citizens: the group is deeply embedded in the country’s infrastructure, and vast volumes of taxpayer money have been pumped in both as debt (from public sector banks) and investment (especially from the Life Insurance Corporation). How will the allegations impact India?
Please note: This is the second part of our two-part series on the Hindenburg report. In the first part, we looked at the accusations of the American short seller against the Adani Group and explained the mechanics of the alleged fraud. You can read it here.
Written by: Samarth Bansal
Adani Group shares dropped significantly on Monday as the company's denial of Hindenberg’s allegations didn’t calm investors, leading to a further market decline and a loss of $65 billion in stock value.
Adani’s fate matters, and it’s not only about the stock market. In today’s issue, we explore the implications for banks, the Life Insurance Corporation, infrastructure plans—and what this affair reveals about India’s political economy.
One: Should we worry about our banks?
Adani bets on capital-intensive industries, so its rise is fuelled by borrowing money. The group’s total outstanding debt is around Rs 2.2 trillion (2.2 lakh crore), according to the latest data.
Their borrowing strategy has changed over the years. They started seeking funding beyond domestic banks, mostly through foreign bonds, reducing their reliance on Indian banks. More than half of its debt is now internationally sourced.
The extent of the risk from Adani to India's banking system is a matter of debate.
Some remain worried: India’s public sector banks have previously suffered from large corporate defaults. Although steps have been taken to improve their finances, a new default by a big company like Adani, in theory, could strain their financial situation.
But reports by brokerages Jeffries and CSLA say Adani’s debt does not pose a risk to Indian banks.
1) In absolute numbers, Indian banks have an exposure of around Rs 800 billion (80,000 crore) to the Adani Group as of March 2022.
2) Now look at percentages: Indian state-owned banks account for 30% of Adani Group’s debt, but this debt has not increased in the past three years, says CSLA. Most incremental funding came from overseas. Private banks’ share is under 10%.
3) Adani's group’s debt accounts for less than 1% of total loans across the Indian banking sector, according to Jeffries, which said that banks’ exposure is within ‘manageable limits’.
What banks are saying:
There is nothing alarming about our Adani exposure and we don't have any concerns as of now,” Dinesh Kumar Khara, chairman of country's largest lender State Bank of India, told Reuters on Friday. Khara said the Adani Group hadn't raised any funding from SBI in the recent past and that the bank would take a “prudent call” on any funding request from them in the near future.
What to look for:
What State Bank of India and others do next will therefore reveal the extent of state support for Adani. Lending more to the group would protect the capital that banks already have at risk in projects under construction. It would also signal that New Delhi is ready to throw some sovereign weight behind a tycoon who is building critical infrastructure and is in the eye of a storm.
Two: What’s happening with LIC?
Private Indian institutional investors—like mutual funds—have not shown significant interest in the Adani Group. But India’s largest insurer, the Life Insurance Corporation (majority owned by the government), has heavily funnelled middle-class savings in the Adani Group.
Between September 2020 and December 2022, according to the Indian Express, LIC increased its holding significantly. For example, in the group’s flagship Adani Enterprises, LIC’s stake rose to 4.23% from less than 1%.
LIC’s investment in five of the seven listed Adani Group companies—Adani Enterprises, Adani Green Energy, Adani Ports, Adani Total Gas, and Adani Transmission—has increased to $9.5 billion. These holdings accounted for 4.6% of the total market cap of these five companies as on Sep. 30. This is nearly five times the volume that mutual funds have invested in the same stocks.
So a significant drop in Adani stock prices will negatively impact the returns of many LIC policyholders.
Why it matters:
[T]he size and scale of LIC make it a critical variable when it comes to the Indian middle class, which often depends on the company for critical products like post-retirement savings. LIC has a massive 250 million investors and the funds it manages are as large as the entire mutual fund industry.
LIC said it will hold talks with Adani’s management within days to seek clarifications on the criticism:
"Presently there is a situation that's emerging and we are not sure what is the factual position ... Since we are a large investor, we have the right to ask relevant questions and we will definitely engage with them," LIC Managing Director Raj Kumar told Reuters.
Three: What happens to India’s infrastructure plans?
The Adani group dominates India’s infrastructure: it controls a significant share of India's airports, ports, roads, city-gas distribution, power generation and distribution, and it is expanding in newer sectors like drone manufacturing, data centres and green energy.
This raises the big question: what will the fraud allegations mean for India’s infrastructure plans?
It’s hard to say anything concrete at this point. Only speculation.
In Bloomberg, Mihir Sharma argues that the Indian public is aware of the extent of corruption and mismanagement, so they expect companies like Adani and Ambani to deliver results:
Indians’ real fear is something else — that Gautam Adani and his companies simply cannot do what they say they will. India is not necessarily short of capital to achieve some of these ends. It is, however, certainly short of implementation capacity. This is what Adani’s companies has promised to supply. The public sector is too inefficient to build what India needs; the rest of the private sector is too concerned about political risk…Wherever the money may have come from — public sector banks, pension funds, faceless pools of offshore capital — what matters for India’s growth is how productively it is spent.
If Adani's firms deliver even some of its promises, argues Sharma, they may eventually reach paper valuations, but if they fail, it’s not just the investors who suffer—it may also harm India's industrial policy.
Fourth: What does Adani’s growth tell us about India?
Sometimes, the danger with pragmatic arguments—“yes, we need Adani for India’s growth”—is the normalisation of political structures whose impact is not visible in the short-term.
So it’s worth asking: should big government contracts and capital be so densely concentrated with one group?
Allegations of cronyism surface repeatedly. For example:
When the Indian government approved the privatisation of six airports in 2018, it relaxed the rules to widen the pool of competition, allowing companies without any experience in the sector to bid. There was one clear winner from the rule change: Gautam Adani, the billionaire industrialist with no history of running airports, scooped up all six.
This can also be a potential point of failure for the Adani group:
“If Modi loses on election day 2024, you’ll see the [Adani] stocks will correct immediately,” says an investment analyst in Mumbai. “If your protector gets dislodged then you lose access to that capital.”
In a prescient essay for the Seminar, journalist M Rajshekhar—who has reported on Adanis for more than a decade—argued that Adani’s case shows how the nature of political corruption has changed in India. It may be the case that you can’t just pay extra to bag the government contract—but if contracts go to people close to the ruling party, what’s that, if not corruption?
This discontinuity calls Harvard academic Michael Walton’s ‘Rent-Sharing’ model to mind. Here, governments lather a few firms with a cascade of benefits – like land at low rates, easier access to state contracts, and bank credit. Supported by this largesse, these firms outcompete rivals and, ergo, make supernormal profits which are then shared with the political party. This is a different model of crony capitalism from what we saw under the Congress. In the coal and hydel scams, most companies paid their rents upfront – a one-time payment. Only in especially profitable projects do politicians seek equity. In rent-sharing, however, there is a more steady stream of payments.
So critics have started comparing the ‘India model’ to the Russian oligarchy.
“Is India going to move towards the east Asian model or the Russian model? So far the tendency looks towards the latter [more] than the former,” says Rohit Chandra, assistant professor of public policy at the Indian Institute of Technology Delhi. “It’s not clear whether India’s concentration of capital will lead to the long-term benefit of Indian consumers.”
The bottomline: The truth is, it’s too soon to draw any meaningful conclusions on how things will pan out. These are only scenarios and speculations. And the news cycle will soon move on—the Union Budget is around the corner. In the background, though, it’s worth keeping an eye on how the Indian government, investors, and crucially, the regulatory body SEBI responds to concerns raised by Hindenburg. The response in itself can be revealing.
Our Big Story on the Hindenburg allegations. Quartz asks if Adani has become too big to fail. Indian Express on LIC’s Adani investments. Financial Times has a good long read on Adani and concentration of power. Seminar essay on the changing nature of state-capital relationship in India. Bloomberg News column on what’s at stake with Adani’s infra projects.