The Downside of Systematically Important Billionaires

The Union Finance Secretary dismissed l’affair Adani as a storm in a teacup. He is right of course. The personal misfortunes of the Adani family are unlikely to shake the financial stability of India. But it is a rather large teacup, even post denouement, valued at US$60 billion. If the “teacups” of all of India’s 151 billionaires are added up they amount to around US$650 billion – larger than India’s foreign reserves. The growth story of India’s billionaires has just begun. Benchmarking with China the number is set to triple or more, as the economy inches towards its long-term target of GDP at US$10 trillion.

The upside of a phalanx of billionaires

A growing number of billionaires showcases the unleashing of private enterprise and creates expectations that the rising tide will raise all boats, including government revenues, thereby expanding fiscal space for investment in public services. A case can be made that irrespective of the size of the “teacup” of individual billionaires, each has systemic value far beyond the valuation of each fortune – these being the socialized benefits of concentration of economic power. This logic drives diplomats, all over the world, to facilitate and support the entry of home private industry and business representative in overseas markets.

The Adani Group has been particularly aggressive at investing in India’s near abroad over the last decade. In doing so, it has supported the actively outward orientation of government policy. The Indian public sector is not structured to extend India’s business reach beyond our shores on a sustained basis. Co-opting nimble private enterprise is a better bet to be the face of India abroad. Overseas investments influence global perceptions about the home country via the virtual national flag they plant, wherever they operate.  So, how they operate matters.

The Adani group has adapted to this role with eagerness and breathless energy. It supplies electricity generated in its coal-based plant in Jharkhand to Bangladesh via a dedicated transmission line. It is a partner in the Colombo West Port in Sri Lanka and is developing the wind power potential there. More recently, it is has become a partner in the Haifa Port in Israel. It owns and operates coal mines and a port in Australia. It also owns coal mines in Indonesia.

It doesn’t end there. The Adani group has massive investments in infrastructure and logistics within India – eight airports, transmission lines, power distribution, green power generation, investments in logistics – roads, warehouses, and ports and most recently television. The group accounts for around 4 percent of the market valuation of Indian stocks- by all accounts, a systemically important company.  

Red flagging silos of “irrational market exuberance”

Institutionalized red flags, which get raised when entrepreneurs depart from the beaten path can either deter non-compliance or ensure that the ensuing contagion does not affect the wider eco system, of which government is a key player, either directly, or through state owned enterprises and banks. This practice seems not to be in evidence, in the curious case of the Adani Group consisting of seven listed companies. Hindenburg Research, a United States based short-seller, shorted US$ denominated bonds and derivatives of Adani Group companies, listed in the US, alleging malpractices by Adani Enterprises (AE) to spuriously boost the value of its stock listed in India, prior to an offer for sale of shares to the public worth Rs 200 billion, opening January 27 and closing January 31, 2022.

The opportunity to sell short arose because the market price of Adani Enterprise (AE) shares increased by 2.45 times between June 1, 2021, and December 1, 2022, when Covid-19 was at its peak. The short seller alleged in a report published on January 24, 2023 that standard templates of round-robin buying and selling transactions within connected companies was used to pump up the value of shares. They also alleged that shareholders included in the “public” segment, were actually connected individuals and companies, thereby making some group companies non-compliant because real public shareholding was well below the required 25 percent.

Despite denials of any wrongdoing by AE and no overt steps by any Indian regulator to red flag the offer instrument, there was a massive erosion in the AE share price to Rs 2975/- by December 31, well below the minimum price of Rs 3276/- per share sought by AE. Ultimately, better sense prevailed, and AE withdrew the issue voluntarily due to the vitiated circumstances around it. It was an appropriate gesture – the saving grace of the entire affair. On February 7 the Adani Group walked-the-talk on financial stability by pledging to pre-pay outstanding debt of US $1.1 billion before scheduled repayments in September 2024.

The upside of globalization

Between January 24 when the Hindenburg Research Report was published and February 4, 2023, the total market cap of Adani Group fell from ₹19.21 trillion to ₹10.08 trillion, marginally ahead of the 2021 valuation of Rs 9.62 trillion. This is a cautionary tale of our globalized world that opportunities come with threats. The threat (which is also a safeguard for small investors) is that globalized rules of play apply. The potential for short selling of overvalued stock is an effective market safeguard against regulatory laxity in reigning in market malpractices. It’s use in India by deep pocket overseas investors is discouraged via a thicket of regulations, dampening the incentives to short sell. Booming markets are preferred as a proxy for a booming economy – especially in emerging markets. But as Indian companies reach global scale, liberalizing short-sells can only add to the transparency and the efficiency of Indian markets. AE was clearly unprepared for the assault. The lesson is that the reach of global markets far exceeds the comfort that accommodative home governments might extend to protect nascent, domestic business.  

Consistent regulation trumps occasional “for profit” vigilante justice

Nevertheless, it is also true that vigilante justice can destroy the eco system in which large private enterprises proliferate. India experienced the drought of large private enterprise in the 1970s post the waves of nationalization and the subsequent drag of large-scale misallocation of scarce capital to public enterprises. It would be a mistake to retrace our steps to that past. Far better to further institutionalize effective oversight by autonomous regulatory entities like the Securities and Exchange Board of India to brings consistency and transparency to how rules are implemented.

Billionaires are an off shoot of the vastly enhanced business opportunities thanks to globalization. In the near term, globalization is in retreat, in the face of resurgent nationalism and a realignment of regional alliances. But the long-term advantages it offers of efficiency and scale are enduring propositions, especially in a world forced to find global solutions to climate change. This is good for the global economy, for India and for its billionaires. Just as surely, restoring the principle of “the rule of law” as opposed to the practice of “rule by law” and the exercise of discretion, whilst sipping from billionaires’ teacups, are useful guardrails, to ensure optimum use of global economic opportunities. The homespun chai pe charcha (tea house chats) fits the Indian environment best.

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