Adani rout passes $80 billion as stock sale fails to stems doubt

The crisis of confidence plaguing Gautam Adani is deepening, with the selloff in the Adani group shares triggered by Hindenburg Research's fraud allegations rapidly turning into a meltdown despite the completion of a key share sale.

The declines accelerated in afternoon trading in Mumbai after Bloomberg reported Credit Suisse Group AG has stopped accepting bonds of Adani's group of companies as collateral for margin loans to its private banking clients. Adani Enterprises Ltd., the flagship firm that completed a $2.5 billion follow-on stock sale Tuesday, lost as much as 34.7%. Adani group's dollar bonds also pared earlier gains.

The turmoil indicates heightened concern over the debt load incurred by the conglomerate after a rapid expansion into industries from green energy to media, with short seller Hindenburg accusing it of inflating revenue. With the losses passing $93 billion across the group's stocks, banks including Barclays Plc have asked for more stock collateral on a $1 billion loan, Bloomberg reported.

"Caution on Adani group stocks has increased after the news on action taken by Credit Suisse," Sameer Kalra, founder of Target Investing in Mumbai, said. "This can put a financing hurdle for group's further growth." 

The offering by Adani Enterprises was India's largest follow-on share sale, and was fully subscribed on the final day, aided by a last-minute surge in demand from institutional investors. At least two of India's biggest business families, including tycoons Sajjan Jindal and Sunil Mittal, are also said to have participated in it, in a sign of solidarity with Adani.

Interest from retail investors — who Adani was hoping to attract — was notably weak. The offering attracted overall bids for 1.12 times the amount of shares available, less than six out of seven jumbo-sized sales analyzed by Bloomberg.

Adani Enterprises sank to as low as 1,941.20 rupees on Wednesday, 38% below the lower end of the offer price range of 3,112-3,276 rupees. The firm is expected to announce the final price for its offering later Wednesday.

The worsening rout in Adani weighed on India's broader benchmarks, with the Nifty 50 erasing budget-fueled gain of as much as 1.8%. Life Insurance Corporation of India, an Adani shareholder and an investor in the share sale, plunged more than 10%. 

"The problem is now that the dynamics are becoming a self-reinforcing negative feedback loop and investors are now just dumping the shares and asking questions later," said Peter Garnry, head of equity strategy at Saxo Bank A/S. "This is potentially a bigger problem for Indian equities which have done so well during the pandemic as China pursued its zero Covid policy. The long-term ramifications could be quite negative."

Although the bulk of the group's dollar bonds climbed earlier in the day, some have since trimmed those gains. Only four out of the 15 US currency notes were still up on the day as of 2:10 p.m. in Mumbai. 

What's Next?

The storm engulfing Asia's richest man has become a test case for India as well, with Hindenburg's allegations raising questions over the country's corporate governance, while Adani himself has called the report an attack on India itself. It has turned the conglomerate into a drag on the nation's stock markets, an abrupt reversal from last year when Adani-linked stocks helped drive a world-beating rally.

Market watchers see the fight between Adani and Hindenburg continuing, after the two traded barbs earlier in the week. The Indian conglomerate has called Hindenburg's report "bogus," threatened legal action and said it was "a calculated securities fraud" in its 413-page rebuttal, which the short seller said ignored all its key allegations and was "obfuscated by nationalism."

Adani's stock prices decline poses a serious threat to the conglomerate as it uses shares as collateral for its debt: Adani on Friday added about $300 million worth of shares for the $1 billion loan made by a group of banks, according to people familiar with the matter.

"The important thing to watch now post allotment is what level of holding period the investors are willing to have on these shares," Target Investing's Kalra said. "Having a few investors getting most of the allotment, there is a risk of some portion being sold immediately."

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