A political economy reading of Adani’s stock market rise-and stumble…

Deepanshu Mohan
10 min readJan 31, 2023

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The nature of widespread attention evoked across the financial, business, and political landscape from the Hindenburg Report-Adani Enterprises faceoff offers a telling tale about the ‘volatile’ state of big private capital-government relationship in India.

By last Friday morning, Adani’s conglomerate business group lost 51$ billion in market value, post the releaseof the Hindenburg Report. The US-based short-selling firm, had accused the Adani group of serious malfeasances, like the use of offshore investment funds and tainted brokers to boost both share prices and group earnings.

Despite the continuous dip in domestic private investment across sectors in India over the last decade, the Adani group has risen and shone like no other firm in India-or anywhere across Asia. The five years rise in Adani’s stock performance and asset ownership levels has trumped even the likes of Elon Musk’s Tesla Inc. or Jeff Bezos’s Amazon.

Since 2020, the surge in Adani’s stock price topped all the madness seen even in America’s equity markets (See figure below). It has therefore been observed as the poster boy of India’s aggressive bullish run in the equity markets. So, anything going amiss with the firm’s stock performance (or macro-fundamentals) is likely to consequentially affect both, the domestic and foreign business sentiment in India.

A few key questions arise at this point: What does the recent stock market stumble-triggered from Adani’s short selloff position-reflect on India’s stock market volatility? Also, what does such an episode say about the political economy of big private capital-government relationship in India?

Some essential background context needed in responding to both these questions.

The Stock Market scenario for Adani

The short selloff position wiping off 51$ billion worth of Adani’s market value in less than a day caused a tremor-panic in India’s bullish stock market, which was gearing up for an FPO to be announced by Adani Enterprises. Some even questioned the timing of the Hindenburg report for this reason.

The Adani group later put out a 413-page rebuttal to the allegations of stock price manipulation and accounting fraud put forth in the 106-page Hindenburg report. As Andy Mukherjee in his recent column asks: “Is the response, backed by the claim that the group may pursue remedies, as weighty as it is voluminous? Perhaps it doesn’t really matter.”

According to Mukherjee, the real test for Adani group right now is a ‘perception battle’, emerging from its upcoming FPO share sale and capital-raise, where the Group in a 200 billion Rupee public offer, has already allotted about 60 billion rupees of shares at the top end of the per-share price band of 3,112 rupees to 3,276 rupees.

It is asking investors to buy the shares at a price which is more than its current market value, and while those with a higher capital base may do so, post the Hindenburg report release, the broader investor confidence in Adani’s portfolio may have been dented. The only constituency, according to Mukherjee, that remains to be still convinced is retail, who need to put up 70 billion rupees, or less than $1 billion in the FPO.

Even though, for now, the storm may appear more weathered, a lot has-or may change over time-for Adani’s borrowing power and capital raising strategies in the future. For example, according to M. Rajshekhar, a key point to observe is the Adani group’s recent borrowing strategy which dramatically changed with its growth over time. He argues:

“By 2019, it (Adani Group) had begun looking beyond domestic banks, tapping funds from overseas, mostly in the form of bonds, instead. That year, trying to understand how the group was financing its quicksilver expansion, this reporter had interviewed a highly-placed finance executive at the group. Bank funding has been quite constrained the last three years, the executive said in that discussion. For the next five to ten years, he had said, the global bond market will be the most important source of funds for the group. This is where Hindenburg enters the picture. The short-seller is not going short — betting a firm’s stock will lose value — on Adani’s shares. Instead, it’s focusing on international bonds. It holds, as its report said, “short positions in Adani Group Companies through U.S.-traded bonds and non-Indian-traded derivatives, along with other non-Indian-traded reference securities””.

What does that mean? According to Rajshekhar, any future bond issues by a company whose bonds are shedding value might find fewer takers. Alternately, it might have to pay higher interest to attract investors. This is where the scenario may get a little tricky for the group in the longer future to raise capital-even its FPO may see a much declined level of optimistic on the retail side as one would have not imagined earlier. In any case, when it comes to investor sentiment analysis for the stock market, a lot’s been driven by a ‘Wild West’ hyper-optimistic wave in the last few years.

Indian Stock Market’s ‘Wild West’ Bullish Run-in recent years

A year and a half ago, this author explained how India’s stock market performance, at a macro-level, was witnessing signs of a ‘Wild West’ phenomenon with a range of IPOs (from Paytm to Zomato) in the fintech space busting flat. Profits were soaring high for a few firms while others, despite low earning, were aiming big in raising cash through IPO’s.

More firms in need of raising big capital, were turning to debt and equity market for funds. This growth, however, was dominated by a single equity issue of Rs 531 billion by Reliance Industries, which was the largest rights issue India has ever seen.

A bulk of funds mobilisation through the primary capital market in 2020–21 also happened through debt instruments. Issuances of debentures peaked at Rs 8.6 trillion during the year. These were 31.6 per cent higher than debentures issued in 2019–20, of the order of Rs 6.5 trillion.

Amidst this, India’s fintech market, and the ‘app-based digital business model’, which has continued to boom, as observed in the rise of start-ups over the last few years, saw a few hyped Initial Public Offerings (IPOs) announced recently, albeit with mixed results.

Zomato, the first of a generation of internet unicorns to tap India’s capital markets, generated a ‘seldom-seen frenzy’ among the local investment community. The start-up soared more than 80% in its debut launch, following a $1.3 billion IPO.

However, for Paytm, India’s pioneering digital payments start-up, its IPO launch dream couldn’t have started on a more disastrous note. Shares continued to plummet for a second day after its $2.5-billion IPO, marking one of the worst debuts ever by a major technology company. Its stock fell further by about 13% after three days of the launch (with a 27% plunge on its debut Thursday), cutting its market value to about $12 billion. Paytm’s parent company, One 97 Communications Ltd, raised a record IPO sum, but its disastrous trading debut sparked criticism that the company and its investment bankers had pushed too hard in the offering.

Underlying all these trends remains a structural concern that many miss: the widening discord between the stock market performance of listed firms (or those new to raising capital) and the underlying macro-numbers of their actual performance, P-E ratio, debt positions etc. In crisis terminology, a growing disconnect between the performance of capital markets and the real economy also signals the formation of a bubble, or a “mania”.

India’s ‘mania’ problem may accentuate in the future if similar such episodes (what was seen in the Paytm-Zomato instance or the Hindenburg-Adani faceoff) continue causing massive selloffs in temporal intervals.

Also, in much of the stock market performance behavior at this point, the substantive rise in ‘price-driven expectations’ or ‘stock prices’ can’t be explained by any logical deduction, or an objective faith in the market’s fundamentals, or by the strength of an economy’s recovery.

Rather, it’s explained by the ‘irrational exuberance’ visible among investors amid short-term capital inflows from foreign institutional investors (FIIs), most of which is “hot money”, apart from those invested in form of equity-backed systematic investment plans (SIPs).

How long a ‘Wild West’ mentality would continue to grip investor sentiment in stocks (or in Adani’s poster boy image) is difficult to estimate-one can’t predict how investors would react to rhetoric or narrative-fuelled speculative information flows. But what is certain is the fact that the underlying performance of the equity market may continue seeing periodic peaks and troughs spaced between short-timed intervals.

All of this also raises a series of fundamental political economy questions for an already fragile, disorganised biz-financial landscape like India’s, where the concentration of wealth and profit-generating power is vested in less than top 1% of the top-firm class (mostly run as family based conglomerates).

The political economy questions

Noted political economist Atul Kohli, in his work on politics of economic growth in India (1980–2005 period), provided a detailed insight into the ‘political’ and ‘political economy’ landscapes shaping India’s growth trajectory during the 1980s, 1990s, and 2000s.

His work highlights the essence of seeing India’s entry to the global economic landscape (in the 90s) as a product of incremental, gradualist reforms of the 80s based on attitudinal shifts observed in the ‘state-capital-private business’ relationship.

What’s central to the pursuit of Kohli’s thesis is a theoretical (more abstract) question: Did India’s growth acceleration (during the 1990s, 2000s) resulted from the (nation) state’s embrace of neoliberal (or pro-market) policies, or from some more complex but identifiable pattern of state intervention?

The 1991 and post-1991 period is understood as part of the ‘pro-market’ growth trajectory where pursued economic reforms-undertaken more on the capital market side-allowed our ‘markets’ to operate more freely, flexibly in certain sectors (telecom, automobiles, aviation, IT, construction, consumer goods etc.) with the aim to crowd in private investment opportunities.

It is true that a push for market-led growth allowed economic possibilities and upward income mobility for higher income classes across the nation, even though the distributive end of any such growth-accrued gains failed to allow greater income (and social mobility) amongst the more vulnerable, economically depressed classes. Welfare distribution or essential social expenditure wasn’t prioritized in fiscal policy for most of the 90s and thereon.

Nevertheless, from this period onwards, one saw a strengthening of the ‘state-capital-private business’ alliance like never before, often at the cost of preexisting social and economic protection available to India’s deeply fragmented labor force.

The Adani-Modi alliance based on a newly designed ‘pro-business’ regulatory outlook emerging from the BJP’s rise to power at the national level post 2014 signals a similar phase in theory- but with a new twist and turn.

As Adam Tooze argued in a recent column, “Driving national infrastructure development (in India), Adani personifies the oligarchic linkages and rentier profits generated by licensing system for infrastructure on which Modi’s growth model has heavily relied.”

A lot written and said about the success of the ‘Gujarat growth model’ pivoted around the emergence and wider presence of such network linkages and rentier profits, driven by large capital infra-investment from firms like Adani’s, which, ever since Modi became PM, entered the national scene.

Adani’s growth has been driven by a cycle between rising equity values and corporate debt. Already In 2014 Gautam Adani boasted that his deals were “immensely bankable”.

As the FT noted back in 2020: “Some argue the concentration of economic power in family-run conglomerates is a way to fast-track India’s economic development, like the chaebol did for post-war South Korea.”

It is true that family-run businesses have been important in India’s business historical landscape always, but never before have any one or two large conglomerates, holding large assets been this debt-exposed the corporate sphere to borrowings from state-run banks, public exchequer money at this level. It signals the realization of a ‘too big to fail syndrome’ for certain institutions, which will make foreign investors more wary from investing in India (FDI levels as a result have already been quite volatile).

In ‘New India’s’ state-big business compact, the extent to which big capital firms like Adani’s are exposed to national asset classes, financed/depended on the exchequer (or citizen tax money) requires greater scrutiny. State-owned banks have already lent twice as much to the Adani group as private banks, with 40 per cent of their lending being done by SBI. This irresponsibility has exposed the crores of Indians who have poured their savings into LIC and SBI to financial risk.

LIC in a public clarification said it acquired Adani shares for Rs 30,127 crores but their market value is Rs 56142 crores even after the big fall in Adani stocks last Friday. What’s to be mindful of is how, a few days ago before the stock market collapse for Adani share value, the market value of Adani shares in LIC’s books was a little over Rs. 80,000 crore. And in just 4 days the LIC saw a portfolio loss of about Rs 23, 735 crore. That’s a large sum of money to lose for a company that has thousands of crores of long-term savings of average Indians pledged with it.

To summate, a short reflection on the probable trajectory state of India’s political economy state, amidst all this news is deeply warranted. In a column written few years ago, I argued, that India’s growth trajectory and state-private capital relationship was reflecting common traits with 1980s Latin America and the Russia of 1990s, where an ad-hoc ‘pro-business’ policy outlook was making certain firms to monopolize asset ownership, rent-extraction at the top level (with support of the government), while cutting down on competition and the entry of new firms, across sectors.

Adani’s rise in the Indian corporate governance space -much like Ambani’s-has been part of shaping that trajectory, which is worrisome. The issues, raised here, strike at the heart of the Indian corporate sector scene, where a few family-controlled conglomerates dominate the business scene in an opaque manner, exposing the robustness and resilience of the corporate governance system and the pre-existing regulatory structure.



Deepanshu Mohan

Associate Professor of Economics & Director, Centre for New Economics Studies, O.P. Jindal Global University…