Indian law students are reporting for JURIST on law-related developments in and affecting India. Here Apoorv Vats, a second-year student at NALSAR University of Law, files from Hyderabad.
India’s Supreme Court Friday turned down the names proposed by the Union government in a sealed cover for the constitution of a panel to strengthen regulatory measures and protect investors following the Adani Group’s stock collapse in the stock market of India. The Apex Court stated that it will select the experts on its own and form an expert committee to review regulatory mechanism in light of the Adani-Hindenburg case. This follows the proceedings on Monday when a Supreme Court Bench led by Chief Justice of India (CJI) Justice Chandrachud proposed the constitution of a committee of domain experts to review the regulatory framework for the stock market. While the central government concurred with the proposal to protect shareholders, it urged the Court to let the government suggest the remit of the committee and potential members in a sealed cover. The Apex Court opined Friday that it wants “full transparency” in the matter.
Over the last three weeks, Adani Group, a multinational conglomerate, has been the subject of a furor both in the stock market and the Indian Parliament over the findings of the New York-based investor research firm Hindenburg Research. The report titled “Adani Group: How The World’s 3rd Richest Man Is Pulling The Largest Con In Corporate History” leveled serious allegations of “brazen stock manipulation and accounting fraud scheme” on the Adani Group.
Hindenburg, which specializes in unearthing corporate malfeasance and shorting companies, pulled off its biggest success as the Adani Group’s listed companies lost over $ 120 billion in market capitalization in mere three weeks since the release of the report on January 24, 2023. Additionally, the Group’s flagship firm Adani Enterprises, called off its fully subscribed $2.5 Billion follow-on public offer (FPO), citing its moral obligation towards investors.
To exacerbate the situation, a clutch of petitions has been filed in the Supreme Court calling for an independent committee to investigate the allegations. Questions were also raised on the decision of government-held entities like the State Bank of India (SBI) and the Life Insurance Corporation (LIC) to invest in Adani Group stocks at allegedly inflated rates. Further, another petition was filed seeking a probe against Nathan Anderson, founder of Hindenburg, terming the report a “criminal conspiracy.” The petition also sought to declare “short-selling” a fraudulent practice.
The allegations against Adani Group in the Hindenburg report are wide-ranging and can be grouped into several categories, which include the use of shell companies for stock manipulation and money laundering, dubious intra-party transactions to inflate earnings, the appointment of inexperienced auditors, and flagrant violations of listing rules. Further, the report also scrutinized the close connection between the Adani Group and individuals who have been accused and sometimes found guilty of fraud and manipulation.
These revelations have significant political ramifications as the ruling Bhartiya Janata Party (BJP) government has been oft accused of indulging in crony capitalism over proximity with Gautam Adani and the meteoric rise in his wealth over the last few years. In this case, the government is under scrutiny for pumping public money into the Adani Group through LIC and SBI to prop up the Group. Both entities have invested huge sums of money at an inflated price of ₹ 3,200 per share into the FPO of Adani Enterprises, even though the share’s prevailing rate in the secondary market was in the range of ₹1,600 to ₹ 1,800 per share. While the FPO was later called off, this suggests that both LIC and SBI failed to exercise appropriate due diligence while handling colossal amounts of public money.
Adani Group’s turmoil is sure to have negative implications for the Indian economy and its reputation as an investment destination. Besides, the Group is too big to fail due to the wide range of sectors it is involved in, spanning ports, airports, energy, and infrastructure. This entire fiasco has also brought to the fore the importance of corporate governance and transparency. It will also serve as a reminder to investors to be more prudent and avoid investing in companies with poor corporate governance practices and a lack of transparency.
Capitalism in India is not guided solely by what Adam Smith described as “the invisible hand of the market.” Certain family businesses also benefit immensely from government patronization. Business government links like these are ill-suited and a glaring weakness of India’s economic rise, which is yet to unravel fully. Hindenburg, surprisingly, was not the first one to raise these concerns about the Adani Group. Multiple investors and analysts had already expressed them, albeit with no one to heed their warnings.