Adani after expert committee report: Neither damned nor redeemed but forging ahead

Does the Supreme Court-appointed expert committee’s report on Adani, based on interim results of ongoing investigations by markets regulator SEBI, clear Adani of blame, as his lawyer claimed after the report was made public? The answer does not quite blow in the wind. The report finds no clear evidence of price manipulation, but in the absence of clarity on the beneficial owners of the offshore entities that own a large part of Adani, we are none the wiser about the veracity of Hindenburg’s other charges against the Adani group than we were when the short-seller dropped its Adani bomb on January 24.

What we do know is that Adani was and remains one of India’s most efficient builders of vital infrastructure, who dreams big and then materializes those dreams across continents, across India’s political divides, and in a growing list of diverse sectors that, by their nature, interface constantly with policy and the state. And that Adani has entered the country’s political discourse, occupying the spotlight turned on crony capitalism, pushing out other legitimate claimants to that space.

Adani companies continue to perform well

We also know that Adani has taken a hit on the market, its companies being removed from key indices, but that most Adani companies continue to perform well, declaring excellent results for the March quarter. The Committee notes with approval the efforts made by Adani to repair the damage done to the group’s share prices by pre-paying debt and obtaining fresh equity infusion.

Also read: SC panel report on Adani Group finds no regulatory failure on price manipulation

The Committee also found that some traders had taken short positions on Adani companies ahead of the Hindenburg report and made good money when the stocks crashed. It would be surprising only if some Indian operators were not around to take advantage of a development such as the Hindenburg disclosure.

Three questions

Answers had to be found to three questions. One, did Adani companies flout the minimum listing requirement? Two, were there related party transactions in Adani company share trades? Were there signs of share price manipulation?

The Committee has given a clear opinion only in answer to the third question, and it is that detailed analysis has not found any clear evidence of share price manipulation. Its claim that there was no regulatory failure is what, in the language of formal logic, would be called trivially true.

Who are the flesh and blood owners of some 13 offshore entities that own shares in Adani? SEBI has been investigating this since 2020, before the Hindenburg disclosure. The investigation continues, and the beneficial owners continue to live happily behind their veil of anonymity.

Also read: Only JPC probe into Adani issue will reveal full truth of the ‘Modani scam’: Congress

If these entities were, in fact, Adani-owned entities, the condition that at least 25% of a listed company should be owned by unrelated parties might be flouted. Since there is no clarity on the identity of the ultimate beneficial owners above the owners of large chunks of Adani shares, it cannot be said that the norm has, indeed, been flouted.

This logic applies to the question about related party transactions as well. The question of related party transactions comes up in the context of price manipulation as well. If a group of individuals or companies were to keep trading among themselves the shares of company X at ever higher prices, driving up the price of X and enticing ordinary investors to buy those shares, helping the original group of companies to offload their accumulated shares after having achieved the goal of driving up the share price, that would be manipulation.

Why would investors buy shares at inflated prices, just because they see an upward trajectory for the shares? Would they not look at company fundamentals? The reality is that the market has been moving up on the basis of shared, willing suspension of disbelief by a large number of investors rather than any rational calculus.

Thanks to the trillions of dollars of liquidity created in the US, England, Europe and Japan to ward off pandemic-induced economic collapse, and the tendency for such created liquidity to move beyond propping up domestic job and income prospects and into the world’s financial plumbing, stock prices had been soaring across the world. Mere millionaires bloated into billionaires. Price-earning ratios lost all ties to rationality and the terra firma. India had initial public offerings of start-up shares with price-earning ratios running to four digits.

Also read: SC grants SEBI time till Aug 14 to complete probe against Adani group

In such a wonderland where share prices and price-earning multiples lose all sense of their place in the world, and race skyward and beyond to jostle with regular space debris, it is easy for investors to join mass hysteria over valuations, instead of sticking to cold rationality over realistic pricing.

The conditions were ripe for share prices to be manipulated through collusive trades. But there is no evidence of such price manipulation. Further, there is no evidence of trade among related parties in Adani shares, because the identity of those trading Adani shares could not be traced beyond a point.

No clarity on owners of 13 offshore entities

The report notes that the very requirement to disclose the last natural person above every entity owning any economic interest in the FPI (foreign portfolio investor) was done away with in 2018 “pursuant to a recommendation of a Working Group and the provisions on “opaque structure” were deleted on the premise that declarations under the PMLA (Prevention of Money Laundering Act) constitute sufficient compliance.”

Were those 13 entities or their holding companies and the Adani-group related parties? In the absence of clarity on who the beneficial owners are, there is no clear answer as to whether any of the trades in Adani shares were related party transactions. Once again, it is difficult to establish regulatory failure.

Also read: Was SEBI fast asleep as investors duped: Cong on no probe against Adani affidavit

If the SEBI norm went by the PMLA norm on beneficial ownership, and still failed to deliver up the flesh and blood owners of the FPIs owning and trading Adani shares, are the PMLA norms sufficient to create transparency in ownership? Clearly not. To be fair, India is far from the first country to struggle to convert legislative intent to identify beneficial ownership into realized transparency.

The British government has a tough time enforcing pious sanctions against Russian oligarch assets stashed away in ‘Londongrad’ (the name is a riff on grad, a Slavic term meaning town that figures in the names of many Russian cities, and Russian billionaires’ penchant to bring their assets to London) because its extant law on disclosure of beneficial ownership has not brought about the desired information on ultimate ownership of companies.

Only when a decade-old G20 proposal to adopt a unique legal entity identifier for every investor, juridical or personal, becomes a reality universally will it be possible to lift the veil of anonymity, from behind which the world’s rich choose to conduct many of their worldly transactions.

Most crucial reform India needs – political funding

On systemic improvement, the Committee omits, expectedly, the most crucial reform India needs to clean up corporate governance and financial reporting: political funding.

Political expenditure on buying up legislators from rival parties, buying voters liquor, paying for attendance at rallies, or creating a social media infrastructure of fake news and influence peddlers cannot be accounted for from legitimate party resources, formed via contributions.

A large chunk of political expenditure must, therefore, come from informal sources. Industrialists have to provide these funds off the books, and must generate them off the books. So long as politics and political funding in India remain dirty, so would corporate finances.

Also read: Giving 6 more months to SEBI to complete Adani probe may create perception of burying issue: Cong

In a polity where political funding comes from companies, but off their books, crony capitalism is an integral part of the political economy. The differentiator among crony capitalists is how good they are at their job of doing business.

In the absence of serious efforts to mobilise political funding entirely from the people, via transparent, automatically-accounted payments such as via UPI (unified payment interface, of the kind used by GooglePay, PhonePe, and PayTM), merely accusing companies of crony capitalism is not particularly helpful either for the polity or for the economy.