Effective supervision by SEBI could have saved a lot of Adani Group investors: Amarjit Chopra

Amarjit Chopra, former President of the Institute of the Chartered Accountants of India and also a part-time member of India’s super audit and accounting regulator, the National Financial Reporting Authority, discussed his views with ETCFO on the significant fall in the share prices of Adani Companies and its implications for the corporate and investor community. Stocks of some Adani companies like Adani Green have plunged up to 70% alone in the past 30 days.

As a quick brief, the stock crisis started after the US-based short seller Hindenburg Research January 24, days before Adani’s record Rs 20,000 crore follow-on-public offer, came out with a report, accusing the conglomerate of “brazen stock manipulation and accounting fraud scheme”, and predicting 85% downside on its stocks. While the fundraising was successfully completed, the Adani Group withdrew the plan citing “market volatility”. Edited excerpts from Chopra’s interaction.

Q: How is your reading of Adani’s issue so far? As per your assessment, did Hindenburg start it all, or was this a crisis always brewing up?

Amarjit Chopra: Adani issue is unfortunate from the Indian corporate world point of view. It can not solely be attributed to the Hindenburg report. Part of it is attributable to the lack of an effective surveillance system of the market regulator SEBI, part of it to the herd mentality of bankers to lend when a group appears to be doing well just on the face of it, partly due to manipulative practices by stock brokers, merchant bankers, valuers, rating agencies and partly due to lack of good governance practices in the group entities. As per reports, Adani Group has amassed a wealth of $120 billion, and $100 billion of the same has come in the last three years.

Adani Enterprises shares with a face value of Rs 10 touched Rs 4,000 so rapidly just before the FPO around November/December 22 and hovered around that for a good part of time till the time the Hindenburg report did the damage. To me, effective supervision by the market regulator at the time the share price was skyrocketing without proportionate improvement of performance parameters could have saved a lot of investors..

Also, the FPO in the price range of Rs 3,112 to Rs 3,276 should have been looked into by SEBI once the Hindenburg report was out. However, SEBI has been shying away from looking at the valuation of issues which was done earlier by the Controller of Capital Issues. This has been causing immense losses to investors.

To me, more serious is the subscribing to FPO on the last date by 5 corporate groups to bail out the FPO despite the traded price of the share being substantially lower than the price at which the shares were subscribed for. Had the FPO not been cancelled, these groups and a few banks and financial institutions would have suffered hugely. To an extent, though temporarily, the whole issue leaves a scar on Indian corporate governance practices.

Q: How should regulators, especially the SEBI or the MCA go about this episode going forward?

Amarjit Chopra: In my view, there are certain issues in the Hindenburg report, for example, a tainted person being appointed as MD of a group company, routing of huge funds through Mauritius entities having the same addresses but not having websites of such entities, etc, which should have attracted the attention of SEBI and/or MCA. Certain objective statement from the market regulator was desirable. However, it has not happened.

It is still not too late to come up with some action plan to generate the confidence of the investors in Adani Group and more importantly in the market regulator itself. I am always at loss to understand why SEBI cannot look at the valuations. Poor investors are being taken for a ride by various start-ups and other entities due to obnoxious valuations. And as regards the MCA, it has the option to go ahead with the inspection of the Adani Group records relevant to the purpose..

Q: What implications does the Adani episode have for the overall corporate India, banking industry as well as investors?

Amarjit Chopra: I am a born optimist. The narrative is neither Adani is India nor India is Adani. Firstly certain Adani group companies e.g Ambuja Cements, ACC, and Adani Ports are doing well and shall continue to do so. Accordingly, banks and investors will have to be selective based on the performance of the respective companies rather than following a herd mentality to invest on the assumption that the company’s stocks are doing very well in the market.

There is a need for the banks to evaluate the collaterals and the business forecasts far more stringently, particularly in view of the fall in the value of shares of various group companies. Banks will have to be cautious that the liquidity crunch, if any, in Adani Group is not funded in a manner that existed in the Indian corporate world before Raghuram Rajan directed the Asset Quality Review and the real NPA problem came to the surface.

One of the allegations in the Hindenburg report is that the current ratio in certain Adani Group companies is below 1. If it is so, it is a matter serious enough to be looked into from the liquidity crunch point of view..

I will hasten to add that irrespective of how Adani Group fares, there are many Indian corporate groups that are doing exceedingly well and shall continue to do so in the years to come. Markets may be volatile in the short run but I do not foresee any major issues in the long run.

Q: Last, do you think this Adani’s juggernaut pause is temporary or do you think this may be structural also?

Amarjit Chopra: I look at it both ways. Whereas in the case of certain Adani group companies it could be temporary but in certain companies like Adani Green it could be structural. It is alleged that green funds from Adani Green have been diverted to promote certain fossil fuel businesses. Also, the news that Australian authorities are looking at Adani coal mines and may take an adverse call in respect thereof, could lead to structural issues in that business vertical.

In my view, though Adani might have become really big no single Indian corporate failure can cause the collapse of the Indian corporate world and Indian banking sector. Even if a few of the Adani Group companies may face stress but it cannot be of a magnitude to fail Indian banking.

We have faced and have been able to wriggle out of NPA levels of more than Rs 18 lakh crore in the banking sector. Compared with that, the exposure of the banking sector to Adani Group (including in respect of companies that are doing well) is not a cause to worry too much. However, there is no denying that the banking industry needs to take care of all red flags being raised and not turn a blind eye to the real issues. None of us wishes to see soaring NPA levels in the banking sector.