Will a clean chit from India’s market regulator signal an end to Adani’s woes?

A favourable outcome would give a major boost to investor sentiment and the conglomerate's recovery process, analysts say

Gautam Adani's business operations are recovering after allegations of improper use of offshore tax havens and stock manipulation. Reuters

The worst may be behind Indian billionaire Gautam Adani as his group’s stocks and business operations are getting back on track following the blow dealt by US short seller Hindenburg Research’s scathing allegations earlier this year, analysts say.

While the findings of a domestic inquiry into the businessman’s empire are pending, there are harsh lessons to be learnt from the crisis, they say.

India’s market regulator the Securities and Exchange Board of India (Sebi) missed the deadline last Monday to wrap up its investigation into the Adani Group. Sebi asked the Supreme Court for another 15 days to complete its work on the matter, having already been granted a three-month extension.

Sebi said it still needed to finish investigating seven of the 24 issues after Hindenburg Research's report in January had accused the Adani Group of stock manipulation and improper use of offshore tax havens, as well as raising concerns about its high level of debt.

The allegations rattled investors, resulting in more than $150 billion being wiped off the conglomerate's market value in the weeks following the report. Adani Group has repeatedly denied any wrongdoing.

Although the crisis sparked a political row and shook investor confidence, the group's shares have managed to claw back some of their losses over the past few months but have yet to fully recover. Shares in the conglomerate's flagship company Adani Enterprises are still down 33 per cent from the start of the year.

Mr Adani’s companies appear to have turned a page “as the steps taken by them post the Hindenburg fiasco … eased concerns of the group’s ability to service its debt and instilled confidence amongst investors”, says Manish Chowdhury, head of research at broker StoxBox.

“Going forward, we expect the group to further strengthen its corporate governance and compliance framework in a bid to regain trust not only from foreign investors but also from domestic lenders and institutions."

But the findings of the Sebi investigation could be a crucial turning point for the group – potentially helping to clear its name, says Akhil Bhardwaj, senior partner at Alpha Capital, a wealth management company.

“The big elephant in the story is whether Adani has used registered companies abroad to conduct business inappropriately and wrongly pumped up the share without required disclosure. Although denied by Adani, the Sebi conclusion would bring clear understanding about the truthful facts. In case any wrongdoing of Adani group is found, it would bring bad name to the nation.”

But if the findings of the investigation of the group are favourable for Adani, this would give a major boost to investor sentiment and the conglomerate's recovery process, he says.

“A clean chit to Adani Group will surge up various Adani companies' share price and strengthen the Adani reputation,” Mr Bhardwaj adds.

“A favouring report would also build confidence in the capital market. The judiciary system, being an independent entity, has appointed Sebi to probe the matter and Sebi has not only tightened regulation and plugged many loopholes which may be used for fraudulent transaction but is also deeply investigating Adani’s transactions along with disclosure from foreign jurisdictions.”

In June, Sebi's board approved changes which mandate additional disclosures from foreign investments, portfolio investors and information on their ownership in rules that come into effect next month.

The regulators this month also said they were considering making Indian conglomerates report transactions that involve their unlisted companies.

Such disclosures would bring about “transparency and fill the gap of possible fraudulent transactions and manipulation of stocks”, says Mr Bhardwaj.

“It quickly brings into notice … change in the ownership of firm and the regulator can take appropriate steps, if required. These disclosures … tighten regulation [and] also demotivates misappropriation of funds and protect investors from a future fiasco.”

The troubles of Adani served as a catalyst for Indian authorities to take a harder look at corporate governance, analysts say.

The Adani crisis lessons relate to corporate governance, transparency, the importance of timely resolution, trust and control, says Hari Shankar Shyam, a professor in management education at Sharda University in Greater Noida.

“If serious misconduct is detected, the [Sebi] report may affect Adani's reputation and share price,” he says.

Until Sebi submits the findings of its probe, which are now due on August 29, little is known about what this will ultimately contain.

But Mr Bhardwaj says the “Sebi conclusion should be supported widely without any contentions”.

As well as Adani's companies recouping some of their losses on the stock markets, large-scale business deals are also showing signs of picking up of late.

In the conglomerate's first major acquisition since the crisis hit, Adani's Ambuja Cements this month bought 57 per cent of shares in Gujarat-based cement company Sanghi Industries in a deal that valued the company at $600 million.

Last Monday, Adani Enterprises said it would buy the remaining 51 per cent stake in Quintillion Business Media.

Adani Power's shares have rallied, rising 6.30 per cent on Friday to 304.60 rupees ($3.66), bringing it above the levels of early January before the crisis erupted, as GQG Partners last week invested $1.1 billion for an 8.1 per cent stake in Adani Power in numerous block deals.

“We believe that the spree of fund-raising in the last few months is a testament of the group’s business prowess and future cash-flow generation capability,” says Mr Bhardwaj.

To boost confidence and show its financial standing is intact, the Adani Group recently took some local bond arrangers on a site visit in Mundra in Gujarat, showcasing the infrastructure of India's largest private port, Bloomberg reported last week.

Any negative “activity related to the group like the resignation of Deloitte makes investors more sceptical”, says Mr Bhardwaj.

Deloitte had resigned as Adani Ports' auditor on August 12, saying this was because it is “not statutory auditors of a substantial number of other Adani Group of companies".

Mr Bhardwaj says “reputation takes a very long time to build” and it can diminish very quickly, so the “long-lasting effect” of the Hindenburg allegations could stick.

In a further sign things may be turning a corner, Adani Enterprises reported a 44 per cent increase in net profit for the April to June quarter.

“These results are a validation of the Adani Group’s robust operational and financial achievements,” chairman Gautam Adani said in a statement.

Analysts say the crisis has been a wake-up call for everyone.

“The Adani-Hindenburg saga had a wide array of repercussions and has taught some important lessons to investors, companies, promoters, government as well as regulators,” says Mr Bhardwaj.

“The community at large has been awakened on multiple fronts, especially on disclosure norms, corporate governance and compliance front.”

Mr Shyam says while “some of the main problems will be resolved, [a] successful recovery will require clear and effective solutions to the underlying problems”.