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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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Corporate misbehaviour and the Adani Group

Let me begin this article by acknowledging that no country is immune to corporate fraud or graft. In fact, I can think of many more cases of fraud in the US and Europe combined than in the rest of the world, including the likes of Enron, WorldCom, Parmalat, Madoff, and – more recently – Theranos, Wirecard and FTX. Aside from cases of blatant fraud, there are also plenty of examples of companies that rely too heavily on short-term debt which, when coupled with opaque reporting / disclosure, can lead to their quick demise should creditors withdraw their support very quickly. In this respect, think about “financial houses of cards” like Long Term Capital Management, Northern Rock, AIG, Bear Sterns and Lehman Brothers. Many of these companies were household names but found themselves over-reliant on short-term debt when creditors turned against them, choking off their access to funding. Behind this rather unsavoury list of companies that have costs investors billions or trillions of US Dollars, there is almost certainly a large swath of other companies that never get called out but are engaged in or characterised by corporate fraud, poor corporate governance, corporate graft, opaque disclosure and nepotism.

In my many years as an investor and banker, I saw plenty of situations involving weak financial disclosure, questionable government-commercial ties and nepotism, often involving companies in countries with poorly-developed regulatory and compliance structures, and / or characterised by weak financial & capital markets infrastructures. These situations also tend to be more prevalent in emerging countries that are not democratic, even those with larger and stronger economies. In other words, I found that entrenched ties between governments and companies set the stage for corporate misbehaviour, with the involvement of state-controlled banks adding another layer of complexity (or, in some cases, stench). Developed countries in general require much more extensive and comprehensive disclosure for companies with publicly-listed equity or bonds, and also have much better protection for minority shareholders. By no means does more sophisticated disclosure, reporting and listing requirements eliminate corporate fraud or keep companies from “sailing close to the wind”, as you can see from the examples I sighted above, but it does make them more likely to be found out.

I have looked at a lot of companies in emerging markets over many years, generally from a credit perspective (i.e. loans / bonds), and there is normally a natural evolution that occurs along the lines of the following:

  • A wealthy family group (or oligarch) starts, inherits or buys a business, often with direct or indirect government ties between the shareholders or the target company itself. The purchase of a business occasionally involves assets purchased on a non-arm’s length basis “on the cheap”, advantaging the buyer but coming at a cost to the seller (especially for assets that are being sold by the state via privatisations),

  • Domestic banks – often state-owned or state-controlled – can’t lend quickly enough at ridiculously off-market pricing to cement their relationships with “profile” domestic clients. Credit support often involves a “look through” to the family (or indirectly to the government) with little if any attention paid to the underlying creditworthiness of the business, and

  • The company’s domestic or international profile, coupled with willing domestic creditors, “persuades” international investors to jump on the bandwagon to cement relationships with high profile, powerful, and visible groups or families.

This sequence of events is not uncommon, even in cases in which international banks have to “hold their nose” in order to become a creditor or banker to high-profile companies and families. By doing so, they open other doors to similar prestigious clients in other countries. In fact, I would say that there are no more than a handful of institutions that would have the backbone to avoid getting involved with some of the larger groups, because it would mean forgoing the prestige and profile of dealing with these companies and their “connected” and wealthy shareholders.

I am providing this background because of what is going on with Adani Group. As I wrote initially when this situation arose, I have not done – and will not do – a deep dive into this situation. Hindenburg Research has already done this. If you want to dig deep, you have everything at your fingertips here: “Adani Group: How The World’s 3rd Richest Man Is Pulling The Largest Con In Corporate History” dated January 24th. Just reading the bullet point summary will give you a good sense of the accusations against the company. If you want to know more about Adani Group, the company’s website is here, and there is a good PPTX presentation about the group here. Adani responded to Hindenburg’s allegations, labelling them as fraudulent, with a lengthy written response and – more recently – a video to shareholders, creditors and other constituents, after the company called off a $2.5 billion capital sale for flagship company Adani Enterprises. Lastly, Hindenburg responded to the 400 page+ Adani rebuttal with a rebuttal of its own on January 29th, entitled “Our Reply To Adani: Fraud Cannot Be Obfuscated By Nationalism Or A Bloated Response That Ignores Every Key Allegation We Raised”.

Whether Adani is complicit in some or all of the allegations from Hindenburg Research is not the major point of this article, although based on the decline in market value of the seven listed companies in which the family has interests, stock investors and creditors are making it crystal clear as to their thoughts. Some lending banks have stopped accepting the stock of the Adani companies held by the family as collateral, and apparently, some of the prices of the affiliated companies’ international bonds have plummeted to “near distressed levels”. I do not have the resources to confirm this, but this information is coming from credible mainstream financial press like Bloomberg and the Financial Times. In essence, my conclusion is “where there’s smoke, there’s fire”, and right now, there appears to be a great deal of smoke around the Adani Group.

I presented the corporate structure of Adani Group in an article touching on this situation earlier this week (extracted from their corporate presentation). This diagram below says a lot about the risks associated with the group of affiliated companies.

The potential issues with Adani Group, acknowledging that these are generalisations based on very limited research specifically into this situation, are:

Affiliate / inter-company transactions: As you can see in the corporate structure, every Adani company is controlled by the family, but each has publicly-listed (minority) shares. I imagine given the nature of the businesses that there are family-to-affiliate commercial or creditor-debtor transactions, and similar transactions across affiliated companies. None of this is problematic so long as any such transactions are fully and properly disclosed, and all such transactions are done on a commercial and arm’s length basis. The quality of the companies’ auditor and the accounting standards under which the numbers are presented both play critical roles in this respect. The major auditors for the Adani Group companies are Dharmesh Parikh & Co. and Shah Dhandharia & Co., and the audits of the companies appear to have been done under Indian Accounting Standards (“IAS”).

Governance / nepotism: The governance of the company is questionable simply because of the common directors across companies. There are allegations about the history of some of the family and prior investigations of their activities, but I did not look into this. It nonetheless raises questions of group integrity that Adani will need to explain. The Board members of the family group are here, with at least the first three Board members (with the Adani surname) obviously part of the family. In addition, I had a cursory look at a few of the companies owned by the holding company, and they all have two or three of the same Directors, cementing the family’s control of each listed operating company.

Government "relationship": Adani is a high profile family name and is well known in India given the family businesses’ involvement in critical infrastructure projects in the country. The very nature of the businesses in which the Adani companies are involved makes the companies critical to the evolution of India, the world’s second-most populous country and one of the fastest growing in the world. There have historically been close ties between Mr Adani and Prime Minister Modi. In fact, the company’s first response to the Hindenburg report was very nationalistic, claiming Hindenburg’s short thesis was an attack on “India Inc.”. To further complicate the relationship, the simple nature of the Adani businesses almost certainly means that the companies are regularly bidding on government projects / contracts. As history has shown, the awarding of such contracts can be subject to graft and bribery. Again, this is not accusatory at all, but it is an area that creditors and equity investors should carefully diligence for companies like Adani. The formal or informal connections to the government do not excuse any sort of mis-behaviour or poor disclosure (or worse) on behalf of these companies since it is such disclosure that is the basis for attracting public equity investors and creditors.

Debt structure / liquidity: Infrastructure is – relatively speaking – considered a “safe” business to many banks because of the nature of the assets (long-term) involved and the importance of such projects to the country. I would think that domestic (Indian) banks have probably piled into the Adani Group companies with few questions asked and are unlikely to have appropriately priced the risk for historical operating performance, capital structure or leverage. As the nature of the underlying (long-term) assets suggest, I would hope that the management teams and controlling family shareholders of the Adani Group companies have been savvy enough to principally use long-term debt to finance their companies. My experience was that high profile emerging markets companies often chose to rely on their personal connections with domestic banks / bankers and other local creditors to finance their companies with short-term debt because short-term debt is much cheaper (and easier) than long-term debt. These companies would simply roll the short-term loans from month to month or quarter to quarter. This all looks good from a cost-of-capital perspective, unless creditors lose confidence in the business.


This is a not a particularly in-depth article on the situation at Adani Group, because I think it is all out there between Hindenburg and Adani, and this situation has certainly had plenty of main-stream media coverage. There is a lot about Adani Group that is common to other large and prestigious emerging market companies. Some of these companies can certainly offer investors exceptional opportunities and returns, and some companies are de facto more or less indirect sovereign risk at the end of the day. So long as a company properly presents itself when dealing with investors or creditors, especially minority investors, there is nothing at all wrong with this. However, the scant and often opaque disclosure from many companies like Adani Group never gives me “warm & fuzzy” feelings, so if you venture into this potentially higher return arena in either debt or equity, make sure you do your work instead of letting FOMO drive your decisions.


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