The rise and rise of Adani can be traced to coincide with the rise of Narendra Modi, first as the CM of Gujarat and then as the PM of India.
Gautam Adani has 11 listed companies on the NSE and BSE Stock Exchanges. The value of these stocks have risen in tandem with the rise of Narendra Modi. One can say that this has been a symbiotic relationship with both feeding on the rise of each other.
But what exactly is the Adani Scam, which was called as ‘The Biggest Con in Corporate History’ by short seller Hindenburg when it came out with a report just before Adani’s 20,000 FPO in Jan 2023.
By then Adani had become the third richest man in the world and there was no stopping him.
How did this happen? The rise did not happen in a day, it was something that happened over several years. Systemic loop holes and direct links with the PM of the country allowed this to happen. No one was willing to bell the cat even when it was clear that the share prices were being rigged.
The method that was used was to list a company with a majority of equity being held by the promoters themselves. Indian Stock market laws require that any listed company has at least 25% shares are held by the public. The main reason for this was to prevent manipulation of share prices. In Adani’s case, an intricate web of companies was created abroad to hold a large chunk of this 25% shares. The rest was being held by Domestic Institutional Investors and Foreign Institutional Investors. Circular trades were carried out over a long period of time to push up the share prices.
The question is how does pushing up share prices help a company? The answer is that the promoters can pledge their shares to banks and borrow money against those shares. The higher the listed price, the more the promoters can borrow.
For example let us assume that a company has 100,000 shares issued at a face value of Rs 10. The equity capital of the company is thus 10,00,000. Now as per regulation the promoters can hold 74.99% shares. Thus they hold 75,000 Shares of the company. Companies acting on their behalf hold 20,000 of the balance shares and only 5000 shares are held by public. The promoter is not selling his shares or trading in them. The companies that act on his behalf trade the shares among themselves, slowly raising the price. If the public, which holds 5000 shares decides to sell, those shares are bought but they don’t sell as they see that the prices are only rising with every passing day. The price of the share starts to rise although the revenue of the company or its profits are not rising in proportion to the rise in share price. Lets say that the shares rise to 4000 rupee per share. At this price the value of the 75,000 shares of promoter becomes 4000 x 75,000 = 30,00,00,000 (Thirty Crores) whereas its actual value was just 7,50,000, an increase by 40 times! Now the promoter goes to a bank and borrows money against these shares. Even if the bank gives him 50% of the current market value, he gets access to 15,00,00,000 (Fifteen Crore) Rupees. As the price rose because of circular deals among related companies, no actual money ever changed ownership, it all remained in the group.
Using this method over his 11 listed companies, Gautam Adani raised Lakhs of Crores of money in local and international markets. He used his proximity to PM to the advantage of raising money.
With this flow of money, he went on a buying spree and has been buying any business that comes his way.
After the Hindenburg report hit the markets, his valuation fell across the board and came down to half of what it was before the report. His personal ranking fell to 30th position in the list of rich people.
The problem with borrowing against pledged shares is that if the value of the share falls then the bank will ask the borrower to make good the margin. So if a person had borrowed 1,00,000 against his shares whose value was 2,00,000 (at 50% margin) and the price falls down to 1,00,000, then the bank will ask the borrower to immediately pay the bank 50,000 such that its margin remains constant at 50%. The borrower then has to come up with 50,000 or else the bank will sell his shares at prevailing market price and try to recover its dues. If margin money is not paid and the bank becomes a seller then there exists a danger that prices may fall much below the 1,00,000 value as there will be panic in the market.
Ever since the Hindeburg report has come out, Adani group has been trying to bring cash to the table and pay off lenders against their pledged shares. This has halted the Adani juggernaut and also forced the group to shelve many projects, delay projects or even sell projects or interests to shore up its finances.
It may finally emerge that the Adani growth was a pack of cards made possible by stock market manipulations and regulatory oversight that looked the other way because of his proximity with the PM.
What impact will all of this have on common people?
As the group will now be in fire fighting mode, trying to prop up its share prices and evade default, its plan for growth may suffer and as it is there is not enough internal accrual to service the debt taken on for its various acquisitions, the group may falter. If that happens then banks, that have an exposure to the group via lending, will have to see their investments disappear. When that happens, the Government will once again rescue the banks and divert tax money to the banks. It has already sent 14,50,000+ Crores to banks to help them write off bad loans. The Adani default will add to the bad loans. When that happens, government spending will suffer and budget of government schemes that affect common citizens will suffer.