Adani Episode and Capitalism
Adani Episode and Capitalism
Malay Pramanik
A few days ago, to be precise, from January 25 this year, a huge uproar started all over the country about Adani Industrial Group, the repercussions of which have not completely subsided yet. This is because a foreign company called Hindenburg Research published a report in which they exposed several so-called misdeeds of the Adani group and alleged that the Adani group's boom, its soaring share price, were all the result of a big fraud.
In the 28 days since the allegations came to light, the shares of Adani Group fell by Rs 11.5 lakh crore in the market. That's 60% below their total value as on 24th January.
The government organization supervising the share market--Securities and Exchange Board of India (SEBI) has launched an investigation into the Adani group companies, regarding the allegations raised in the report.
What happened that such an incident occurred? Various speculations have started, some say that Adani has fraudulently increased the share price, some say that this increase is due to privileges from the Modi government. Various things are being heard.
To understand what happened we need to look at some economic facts and history about the Adani Group.
Core business of Adani Group
What are the core businesses of Adani Group? They are port management, power generation and transmission, renewable energy, mining, airport management, natural gas production, food processing and other infrastructure related industries. All these businesses have one thing in common. All these industries require huge initial investment, and returns grow very slowly. Profit can be seen after several years. Adani Group has almost no industry that has crossed this initial threshold.
What is the source of this huge investment?
Like all other big capitalists, Adani has two sources. Borrowing and raising money from the market in exchange for shares. Adani's speciality is that Adani raised the major amount through borrowing to retain control over the companies. It can be understood by looking at the information below.
TABLE 1. ADANI?S SOURCE OF FUNDS
PERIOD | 2002-15 | 2015-21 | MARCH 21-SEPT 22 |
FROM BORROWINGS | 91.26% | 106.19% | 82.31% |
FROM EQUITY | 8.74% | (-)6.19% | 17.69% |
In 2022, the total debt of Adani Group was 30 billion USD or 2.5 lakh crore rupees.
What did Adani get by showing this huge amount of debt?
The total value of any company's shares in the stock market is called its market capitalization. Market capitalization increases when the share price increases in the market. In the two years before the Hindenburg Research report came out, Adani's market capitalization had jumped to US$200 billion, one of the highest in the world.
Adani has then borrowed by showing this market capitalization. In many cases they have borrowed by mortgaging even their own shares.
How is this market capitalization so high?
This is a bit complicated and we will take a look at Hindenburg's complaints as we look at it.
But, before that we will discuss what determines the share price of a company in the current world stock market.
When a company buys shares, the company pays the buyer of the shares a certain amount of the company's dividend (a percentage of the nominal price of the shares) after a certain period of time.
So in the stock market we can expect that the price of buying the shares will be based on the dividends that one expects to receive on those shares in the next five or ten years.
But, in reality, prices of shares are not fixed in this way in the stock market. People buy shares in the hope that they will make a profit by selling them at an opportune time if the price rises significantly above the purchase price. Therefore, the price of shares is not determined by the calculation of how much will be received as dividends from company?s profit in the next five or ten years. The price is determined by the balance between demand and supply of the shares. That is why if people keep buying more shares then its market price increases and if people sell away shares then its price goes down.
As there are big traders in the stock market and since they buy and sell a large amount of shares, they can largely control the supply and demand of any company?s share.
If anyone thinks that a company's share price increases when its profits increase, or that a company's increased sales raises its share price, they are mistaken. The most recent example of this is Flipkart ? its share price skyrocketed when it was losing billions of rupees.
Why would someone go to buy the shares of a company, that is making losses, at a high price? Because he is also expecting the price to rise further in the same trend of speculation within a few days of buying. He will then sell his shares at a profit and exit.
Adani's share market capitalization rose to among the top two to three companies in the world in 2022 (US$ 200 billion). In their case also the picture of profit rate and total sales of the company is as follows:-
TABLE 2. RATE OF PROFIT & SALES AS A FRACTION OF TOTAL CAPITAL
PERIOD | RATE OF PROFIT | SALES AS A FRACTION OF TOTAL CAPITAL |
2002-16 | 14.69% | 4.03 |
2016-21 | 4.45% | 1.32 |
MARCH 21-SEPT 22 | 3.18% | 1.39 |
That is, while there has been a profit rate of only 3% in 2021, there has been almost same amount of sales and capital invested during that period.
Here's what the Hindenburg Research report says---
The report is a long document of 159 pages. It is filled with many ?facts? and ?arguments? and accusations.
Complaints are broadly categorized as follows:-
a) Fraud in financial transactions and accounting
b) Manipulation in market price of shares
c) Getting various privileges by influencing the institutions like Bank, LIC etc.
Not all complaints falling under these three types can be examined presently. Let's look at some of the main ones:-
(i) Illegal activities through 38 shell companies established in Mauritius:-
Shell companies are companies set up to manipulate in the world of financial transactions. Gautam Adani's elder brother Vinod Adani set up 38 shell companies in Mauritius. Complaints are of two types,
(a) Sending money anonymously to this company and making fake transactions to other companies of the Adani empire, so that the financial health of those companies appears good.
The implication is to show the financial health of the company is sound and thus enhance its credibility before the lenders.
b) Again sending money anonymously to this shell company and with that money buying large amount of shares of Adani Empire in the open market, so that the share prices increase.
It is worth noting here that even if this allegation is true, the total value of the shares increased from 100 billion to 200 billion in 2022 (that is, the share prices doubled), and for that large amount of shares need to be bought by the shell companies is easily understandable.
(ii) Depositing own company shares as collateral for loans in some cases--
This is generally not accepted by lenders, as collateral is required for assets whose value is unquestionably fixed and stable.
But, in this case the loan has been taken by influencing the lenders.
(iii) Banks and LIC have broken and allowed many rules to be broken while giving loans.
There has been a lot of noise about this. It is said that capitalists close to the Modi government are getting a lot of opportunities - this is "crony capitalism".
But, a little thought shows that capitalists close to the central or state governments have always enjoyed extra benefits, irrespective of which party is in government. This is nothing new but a recurrent feature of capitalism.
What then is the significance of the Hindenburg report?
1. There is no satisfactory explanation in the report for the doubling of share prices in the stock market.
2. The rest of the alleged quasi-legal/illegal activities show the possibility of some quasi-legal/illegal actions in the debt collection process.
So what is the reason behind the huge increase in Adani's share price?
We discussed earlier that share prices rise and fall through share speculation. The question is, what can the company itself do to increase its share price? Let's take a closer look.
Apart from the market shares, some companies can take investments from other big companies or wealthy individuals, in exchange for which they give their shares.
When a company starts investing in this way, it sets a value for its company on the ledger. Companies naturally inflate this valuation, adjusting their books accordingly (so that they can get more investment by giving up smaller shares). Thus, after getting some outside investment, its valuation also increases. And getting loans from banks, LIC also becomes convenient. Again by acquiring more property through such loans they further increase share valuation. In this situation, if they issue the shares in the market, its price will skyrocket. And this process continues in a mutually reinforcing manner.
Associated with all this is getting government big projects or orders. And as a consequence three results occur at the same time ? easier access to bigger loans from banks/LICs, big jump in company valuation, and rise in share prices in the stock market. The market starts whispering - "Such company's progress is imminent - its share price will increase" - then through the inherent rule of swindling (phatka) the share prices continue escalating.
In this process, valuations and share prices of Adani and many other Indian big capitalists have increased.
As increasingly the rate of profit in the real economy falls, more and more the capitalists, instead of profiting from production, are turning their attention to the stock market and to increasing wealth from the outside the world of production through this valuation game.
So, whatever the outcry about crony capitalism or government patronage, the Adani case highlighted some common aspects of contemporary capitalism.
Reference: Control, Complexity and Politics: Deconstructing the Adani Affair! by Aswath Damodaran
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