India’s crony capitalism

The Adani Euphoria

By Dhurjati Mukherjee

The Adani saga has unfolded itself and the print media is making headlines on the Hindenburg report and the resultant effects. It is generally agreed that all this is possible in cases where crony capitalism exists which signals a cosy connection between big business and the top political leadership. In the case of Adani, it is quite well known that the Prime Minister enjoys a personal relationship with the group’s patriarch, Gautam Adani and has used his private plane for travel.

Speaking theoretically, it can be said that capitalism is essentially based on cronyism — without nudges from politicians, no tycoon could survive at the top. The State has always been the sales force of big business. There is indeed a symbiotic relationship – business requires the support and blessings of the government, while politicians need financial contributions – both officially and also through indirect, unethical means – to win elections.

There have been many such scams, mention may be made of the global financial crisis of 2008, the Greek default and the eurozone crisis and George Soros’s winning bet against the British pound in 1992 – all these happened in better regulated markets. In fact, the current massive increase in Western inflation is also the result of loose monetary policies, where the regulators failed to anticipate what could be wrong.

The manner in which the Hindenburg-Adani episode has unfolded so far is bound to entice western short seller firms to play the same game. The episode demonstrated that allegations acquire social credibility with the Indian public when they are levelled by an entity based abroad. In a recent paper, Joshua Mitt discussed how short sellers attack firms. The implication is that the best defence of listed Indian firms against potential attacks by Hindenburg like activist short sellers is going to be following superior standards of transparency and corporate governance. It may be mentioned here that when the price-earnings ratio rises from 13.3 percent to 286 in just two years, as it did in the case of Adani Enterprises, the board must ensure that management has a good explanation for it and makes it available to shareholders.

As far as the specific allegations against the group are concerned, it relates to the use of off-shore shell companies located in tax havens to transfer, through fraudulent accounting, money and stocks to these shell companies, using these resources to manipulate and drive up the Adani group’s share prices and then using these inflated value shares as collaterals to obtain large loans from financial institutions. It is quite obvious that the group indulged in such practices only because it had back-up support from the powers-that-be. It is pertinent to mention here that the auditors must have behaved opportunistically in furthering their own economic gains or have been astoundingly stupid and callous.

There can be no denying that the allegations against the Adani group, leading to a drastic fall in market valuations of its stocks as also those of banks, creating unnecessary volatility, warrants a probe by the regulators. The large exposure of the banking system to Adani stocks is a matter of concern, including that of LIC, though some analysts are justifying this as insurance companies need to invest in long-term gestation assets – assets that infrastructure companies with long-term cash flows provide.

Meanwhile, the Congress President, Mallikarjun Kharge, made an interesting observation in Parliament when he contrasted State Bank of India’s alleged denial of a no-dues certificate to a Gujarat farmer for an outstanding amount of 31 paise with public sector entities purportedly granting loans totalling a staggering amount of Rs 82,000 crore to the Adani Group. The Congress leader demanded the constitution of a joint parliamentary committee to probe the meteoric rise, saying the brave Prime Minister had no reason to fear a JPC. Obviously, this is necessary as Indian investors suffered lakhs of crores of rupees in the volatility unleashed by the Adani episode.

Similarly, in the Lok Sabha, Rahul Gandhi spoke about Adani and his meteoric rise. “In 2014, he was ranked 609 in the list of world’s richest men. Then magic happened and in 2023, he became the second richest”. He further stated that Adani now controls 24 percent of our traffic and 31 percent air freight which India’s Prime Minister facilitated. According to the Congress leader: “Adani announced in 2023 that he plans to invest $50 billion to build the world’s largest green hydrogen ecosystem. And the finance minister announced in the budget the government would give an incentive of Rs 19,700 crore for green hydrogen ecosystem, which clearly reveals how the government is trying to back Adani and his ventures.”

The jacking up of prices has upset the capital market with thousands of people losing their money in this manipulated scenario. Moreover, financial analysts are questioning whether the group has the capability to service the huge loans taken for numerous projects. It is indeed distressing that the Securities & Exchange Board of India (SEBI) or any other agency is silent on the matter. while the Prime Minister or the Finance Minister has not yet uttered a word about why and how the Adani stocks got inflated to unimaginable proportions.

The lesson that one can learn from this unethical development is that the whole system is corrupt and geared to the interests of the rich and powerful. The checks and balances system in the country is either weak or not quite independent enough to initiate action against the powerful corporate houses.

Globally, France’s Total Energies has stopped the $50 billion investment in Adani group pending completion of investigation against the group. Also, Norway’s Sovereign Fund sold all the company’s shares worth $200 million. Added to all this, a few days back, Morgan Stanley Capital International (MSCI) downgraded to negative from stable for four Adani companies – Adani Green Energy, the Energy Restricted Group and two subsidiaries of Adani Transmission.  Such manipulation has eroded the confidence of foreign investors in the Indian capital market and may further affect the capital market.

The less said the better about the political system in the country. Not just at the Centre but in states like Uttar Pradesh, West Bengal, Jharkhand, Madhya Pradesh. Chhattisgarh the scenario is the same. Thus, all sermons and talks of inclusive development and concern for the poor and marginalised sections, which appear quite often in the media of political leaders, look to be baseless and are delivered to hoodwink the masses.

The question arises whether the situation can change or would change in the near future? Political analysts are not quite optimistic about this, as the situation is going from bad to worse due to lack of governance, competent leadership and sincerity and honesty in socio-political and economic system. Time to be vigilant.  — INFA