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Opinion With Adani in India, Western banks repeat mistakes made in China

A sign for the Adani Group in Mumbai. (Indranil Aditya/Bloomberg News)
4 min

How could an obscure New York investment company with only a handful of employees see red flags in India’s sprawling Adani Group that were invisible to some of the world’s biggest banks?

This is a question that investors everywhere should be asking after the value of the Adani Group fell by about $70 billion following a report last week from the short-selling firm Hindenburg Research. Here’s another one: Are banks on the verge of making the same mistake in India that they once made in China by failing to look deeply into the operations of companies that they work with?

The Adani Group, run by Asia’s richest person, Gautam Adani, is a vast energy and infrastructure conglomerate that has grown rapidly in India partly because of its ties to the national government which is heavily investing in new roads, airports and power plants. Adani might not be well known outside India, but if you have money in a mutual fund that invests in emerging markets, you very likely have a stake in its success.

Over the years, many Western banks and investors have provided Adani access to debt and equity markets. Even as its share price has been falling since Hindenburg’s report, the company has been working on a plan to raise billions of dollars with the help of BNP Paribas, Société Générale, Goldman Sachs and others. On Tuesday, Adani successfully pulled off the $2.4 billion share sale, despite the broader concerns about its business.

Hindenburg Research, a 5-year-old firm, makes money by digging up dirt on companies, placing bets that their stock prices will fall and then publishing its research. Until now, its targets have often been crypto firms and so-called blank-check companies. Its most high-profile research until now was aimed at electric-truck-maker Nikola Corp. in 2020.

Hindenburg says that several of Adani’s subsidiary companies are vastly overvalued compared with similar businesses and that the conglomerate is carrying too much debt. (Adani calls Hindenburg’s report a “malicious combination of selective misinformation and stale, baseless and discredited allegations.”)

There is more to the report than the price of Adani’s shares — Hindenburg also alleges a web of offshore entities and murky goings-on. But it doesn’t take industrial espionage to conclude that Adani is overvalued. Simple share-price data tells the tale. It’s hard to fathom how global banks with their armies of analysts and reams of information could have been unaware of the problem.

This echoes events a decade ago or so in China. Several Chinese companies that had listed their shares in the United States or other Western countries worked closely with banks, law firms and accountants in those countries. The banks earned enormous fees, and the Chinese owners got rich, too, by selling their shares overseas. But some U.S. short sellers easily found simple flaws in the businesses. In perhaps the most famous instance, a Chinese forestry company turned out to not own the forests it claimed as its biggest assets.

In these cases, the losers were almost always regular investors — often in the United States or Canada. In 2011 and 2012 alone, McKinsey estimated that more than $40 billion in shareholder value was wiped out as Chinese companies listed in the United States were delisted or suspended.

Adani’s share sell-off will mainly hit investors in India. But its debt and other financial derivatives overseas are taking a pounding, too. Emerging market funds that have sought exposure to companies with a stake in India’s rapidly developing infrastructure will surely take losses, and American and European investors will see their savings take a hit. Many Wall Street money managers have recently touted India’s potential, but this scandal may well put a dent in their confidence.

The big Wall Street companies — which too often profit from not seeing real problems in foreign companies — share the blame. Their approach hurts everyone: It supports poor corporate governance and practices that would be unacceptable in Western markets. And it puts investors everywhere at risk.