Explained: Why shares of the mighty Adani Group crashed

Gautam Adani-led Adani Group, with a presence across a plethora of industries, from processed foods to ports to airports to mines, suddenly appears on shaky grounds. 

The shares of all the six listed entities of the Adani Group witnessed a sharp fall on Monday, as the Economic Times reported that the National Securities Depository Ltd (NSDL) had taken action against three foreign funds that are among the top shareholders in the firms.

The three institutional investors,  Albula Investment Fund, Cresta Fund and APMS Investment Fund, were frozen on or before May 31, media reports said. This means they can neither sell their existing securities nor buy fresh ones. 

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The three funds together hold stakes worth ₹43,500 crore in four Adani entities — flagship entity Adani Enterprises Ltd (AEL), Adani Green Energy, Adani Total Gas and Adani Transmission. 

They all fall down

By Monday noon, AEL’s scrip was down 13.27% at ₹1,387.6, while that of Adani Green Energy and Adani Total Gas slipped 5% to ₹1,156.85 and ₹1,544.90, respectively. Adani Transmission was also down 5% at ₹1,522.5. 

The biggest seesaw was witnessed by AEL, whose market cap on the Bombay Stock Exchange plunged to ₹1.4 lakh-crore. According to media reports, the AEL stock has gained a whopping 700% over the past year, with the first five months of 2021 alone seeing a 200% rise.

A Mint report noted that Adani Group stocks had been among the toppers in terms of post COVID returns. Of the top 10 performers, in fact, five had been Adani firms.

Why did the stocks slump?

According to the Mint report, the Adani firms had, in the first place, seen such a meteoric rise in stock prices because of their “very low free float”. About 75% of their shareholding is with promoter groups, and much of the balance is held by foreign investors.

This means very few shares are available in the market for trading, which creates a degree of scarcity for those shares. This phenomenon is said to lead to greater demand heightened prices, though a direct correlation may not be observed. 

Secondly, regulatory action always raises concerns. The ET report attributed the freezing of the three funds by NSDL insufficient disclosure of information regarding beneficial ownership under the Prevention of Money Laundering Act (PMLA). This led to heavy selling in stocks of all the Adani Group firms, which in turn resulted in the price crash.

Any regulatory action typically creates nervousness in the market. This apart, increased scrutiny might eventually lead to significant changes in the shareholding patterns of the listed entities, said Mint. This could lead to changes in the availability of stocks in the market. 

Portfolio concentration

Quoting data from Trendlyne.com, Mint said Albula Investment Fund had 18 disclosed holdings as of March 2021; Adani Group firms accounted for about 95% of its portfolio value. Apms Investment Fund had 11 disclosed holdings, and the Adani contribution stood at about 96%. 

At Cresta, where disclosed holdings in end-March stood at 14, three Adani Group firms accounted for 97% of the portfolio value. Across all the three funds, the concentration of Adani stocks is obviously high, leading to the regulatory action and resultant stock price crash.

Certain other funds also seem to have a high concentration of Adani holdings, said the report. These include Elara India Opportunities Fund, Asia Investment Corporation (Mauritius),  and Vespera Fund. These are, however, not facing regulatory action yet.