The Adani short sale puts investor trust in India in doubt

The big stock-market scams in India over the past 30 years exploited vulnerabilities in the local banking system. However, the country's growing integration with the global economy and international capital means that preparations for the next big scandal may well be under way in an overseas financial center like London or Singapore, rather than in Mumbai. 

Or that's what Hindenburg Research seems to be insinuating in its report on Indian tycoon Gautam Adani, whom it accuses of "pulling the largest con in corporate history." Released Tuesday evening in the US, it was met with a terse dismissal. The timing of the publication "shows a brazen, mala fide intention" to tarnish the group's reputation just as its flagship firm starts a key $2.5 billion share sale, said a three-paragraph rebuttal by Adani's chief financial officer to the short-seller's detailed allegations of stock manipulation and accounting fraud. The lengthy note also asks 88 questions of the world's fourth-richest person; none have been answered so far.

The $12 billion slide in Adani shares following the report's release shows that, at the very least, investors are a little skittish after a five-year, 2,500% rally in Adani Enterprises Ltd., the fulcrum of an empire closely aligned with Prime Minister Narendra Modi's economic program.

Let the shareholders gauge the impact of the campaign against the conglomerate, which CreditSights, a Fitch Group unit, described in August as "deeply overleveraged." The infrastructure player has a key role in everything from coal and power to India's ports, airports and green hydrogen. A previous bout of nervousness in June 2021, sparked by some of the same concerns, fizzled out. Even then, other investors need to reflect on the short-seller's two-year investigation. For it raises many questions about the integrity of the broader Indian market, which is caught between the pressures of financial globalization and political nationalism.

If Hindenburg is right, then a network of shadowy operators has placed itself right in the middle of those conflicting impulses, and is exerting outsize influence over India's markets from overseas in cahoots with corporate honchos back home. Meanwhile, within India, ever-rising stock prices have become a symbol of muscular national pride. And that, more than the allegations about Adani stocks, is what should worry global investors: Are India's public markets trustworthy?

To borrow a phrase from development scholar Lant Pritchett, the Securities and Exchange Board of India ensures perfect isomorphic mimicry. Regulated entities tick much the same boxes they would in a developed market. As in the West, a growing number of these requirements deal with corporate governance. But scratch the surface of disclosures and unsavory characters show up: "briefcase investors," masquerading as Mauritius-domiciled funds, available to any company boss who wants a little buzz in their stock.

The Indian regulator is busy chasing technical yardsticks, such as beating the US on the speed of the local market's settlement cycle. But exchange of assets is only partly about efficiency. Above all, it's about trust, and exemplary punishment — like in the case of Enron Corp. and Bernie Madoff — for those who break it. Is SEBI waiting for a public outcry to go in and clean up the market?

Proximity of family-controlled businesses to political power is an old problem, and by no means unique to India. But the rise of jingoistic nationalism in recent years is adding a new element of impunity to the behavior of some corporate chiefs. Who needs a share prospectus when a yoga guru can tell his followers in an open meeting that anyone buying into his edible-oil company will become wealthy. To project oneself as the flagbearer of a proud, self-reliant India is increasingly seen as a ticket to avoiding scrutiny by the media, regulators or environmental groups, all of whom can be denounced for not being on board with the chauvinistic chest-thumping.

More than anything else, it is this threat of darkness creeping up on India's markets that should worry investors in the Hindenburg-Adani saga.

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News. @andymukherjee70

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.