On Friday, three judges of the otherwise overburdened Supreme Court of India (SC) decided to hear two bizarre petitions pleading for their lordships’ intervention on the recent crash in Adani group stocks, which is supposed to have affected investors, tarnished the country's image, dented the economy, etc. The concerned judges reportedly asked: “It is said total loss by Indian investors is several lakh crores… How do we ensure they are protected? How do we ensure that this does not happen in future?” The learned judges also seem to have expressed concerns over “ensuring that regulatory mechanism within the country is duly strengthened so that Indian investors are protected against sudden volatility which has been witnessed in recent two weeks.”
The story of ‘sudden volatility’ isn’t so sudden and starts in mid-2020, except that it was upward volatility. Since then, anyone with the slightest interest in the Indian stock market, has watched with stunned amazement, the extraordinary rise in the prices of various Adani group shares. While people are generally aware that these stocks had shot up substantially, the story of the rise in Adani Total Gas is worth repeating, in order to put in perspective the recent crash in Adani stocks.
This stock was trading at around Rs100 in mid-2020, the price having hardly changed much since it its debut in the listed space in November 2018. By November 2020, in just six months, it had trebled in value. But the run-up was just getting started. By May 2021, the stock was pushing Rs1,400, a mind-boggling 14x jump in just one year. After a small dip in June and July 2021, the stock rose 62% in just a single month, August 2021. More amazingly, when the global and Indian markets topped out two months later and turned bearish, the Adani stock was unaffected and continued to rise, until it peaked at just under Rs4,000 in December 2022. That is a return of 3,900%over two and half years!
Surely, the company was recording commensurate profit growth to justify this return to ‘investors’? Take a look. The consolidated net profit of Adani Total Gas was up from just Rs430 crore for the year ended March 2020 to about Rs530 crore for the trailing four quarters in December 2022, a very meagre rise of 23% over two years. Now, a 3,900% rise in a stock, backed by 23% rise in net profit, raised eyebrows and got eyes rolling. Most fund managers knew what was going on and stayed away. What if there were a petition then that requested the honourable SC to intervene in the stupefying rise in the prices of Adani stocks? Would it have been heard? Would the learned judges have asked the Securities and Exchange Board of India (SEBI) to ensure a regulatory mechanism so that Indian investors are not lured into such massively rigged up shares, which then—surprise, surprise—crash?
I have just narrated the brazen price rigging of just one Adani stock. SEBI hasn’t made public its findings, if any, on such insane price manipulation. Coincidentally, Gautam Adani, founder and chairman of the Adani group, became the world’s third richest person, “adding over $100 billion in the past three years alone largely through stock price appreciation in the group’s 7 key listed companies, which have spiked an average of 819% in that period,” according to the now famous Hindenburg report.
In the time-honoured strategy followed by many businessmen, the stock was supposed to be parked, money released and funnelled into multiple businesses as the Adanis expanded at breakneck speed into every large business opportunity—from energy to ports, airports, piped gas, agriculture and so on. For conservative and stupid folks, a portfolio manager explained this strategy as follows: “if a heavily debt-funded, asset-heavy business raises equity at high valuations, its investment risk reduces significantly. Its fundamentals get a better market rating. The company also gets ready for the next phase of asset building. It is the Ambani-Adani Aatmanirbhar model. Critics will eat crow when they raise money.”
Well, this so-called strategy now lies in tatters. What went wrong? For one, what Ambani achieved in 25 years, Adani wanted to pull off in five. And to achieve it, the tactics used were: exorbitant valuation, adding Adani stocks to benchmark stock indices and obvious proximity to the Modi government. But they achieved exactly the opposite. Fund managers stayed away, especially when it was clear that ‘foreign institutional investors’ in Adani stocks, were just questionable post boxes -in Mauritius. Second, the Adanis have an asset-heavy model which they wanted to grow at the speed of tech unicorns. There is no example of this working, anywhere in the world. It certainly cannot happen in a country that is heavily dependent on global suppliers of capital since such capital can see through dubious corporate actions. Interestingly, the bulk of foreign investment in the Adani group is from the international bond market which imposes far greater scrutiny of corporate actions than equity markets.
In short, the recent ‘sudden volatility’ in Adani stocks is entirely due to a series of events that were extreme, unique and played out in too short a period. Investors and regulators pretended that it wasn’t so. But then, along came Hindenburg which forced some eyes to open. As hedge fund manager Colm O’Shea has said in another context: “Big market price changes happen when lots of people are forced to reevaluate their prejudices, not necessarily when the world actually changes.” That one sentence should answer all the questions raised by the two petitions in the Supreme Court.
