As most of you are aware, all Adani Group stocks have given its investors multi-fold returns over the past year. The shares of Adani Enterprises and Adani Transmission had surged by more than 900% and 600%, respectively, in just one year! Adani Power and Adani Green Energy stocks had rallied by 260% and 250%, respectively. Since promoters hold a significant stake in these companies (~75%), their wealth has skyrocketed. 

However, many media houses have started to raise red flags on this meteoric rise in share prices. They have alleged large-scale manipulation of the stocks mentioned above. In this article, we take a look into the staggering events that led to the sharp fall of all Adani Group stocks on Monday (June 14). 

The Tweet By Sucheta Dalal

On Saturday (June 12), renowned business journalist Sucheta Dalal sent out a tweet that potentially led to the fall of Adani Group’s stocks. [Sucheta Dalal was the journalist who broke out the Harshad Mehta scam of 1992]

The tweet does not specifically mention any company or group, probably because Sucheta Dalal did not have sufficient evidence against them at that time. However, many in the Twitter universe quickly realised that she was referring to the Adani Group. The tweet indicates that the share prices of Adani Group companies were being manipulated or rigged. It also stated that market regulator SEBI was investigating the matter. Over the weekend, many began to speculate and find out the truth behind these serious allegations.

The Report by ET

Early Monday morning, the Economic Times (ET) published a report that created panic among the investors of all Adani Group companies. It stated that the National Securities Depository Ltd (NSDL) had frozen the accounts of three Foreign Portfolio Investors (FPIs) that held shares in four listed companies of the Adani Group. The foreign funds hold stakes worth ~Rs 43,500 crore in Adani Enterprises, Adani Green Energy Ltd (AGEL), Adani Total Gas, and Adani Transmission.

APMS Investment Fund, Albula Investment Fund, and Cresta Fund are the three FPIs whose accounts were reportedly frozen. All these firms are registered in Port Louis, Mauritius, and have the same addresses. They did not have official working websites as well. The reports indicate that the accounts could have been frozen ‘due to insufficient disclosure of information related to beneficial ownership of the accounts’. An account being frozen means that a foreign fund will not be able to sell any existing securities nor buy any new securities.

The Securities and Exchange Board of India (SEBI) has laid down the regulatory framework for all overseas investors. These rules have been reviewed and amended multiple times to keep them in sync with other laws such as the Prevention of Money Laundering Act (PMLA), the Foreign Account Tax Compliance Act, or the Common Reporting Standard (CRS). As per these norms, all FPIs are required to submit details related to the ultimate beneficial owner of the account. This is to ensure that large amounts of money coming into India are from legal channels or sources. If any FPI fails to comply with these laws, SEBI would freeze their account.

The Impact

The report ultimately led to panic selling in the stock markets. The shares of all Adani Group companies hit their respective lower circuits during the pre-open session (from 9:00 am to 9:30 am). Adani Power, Adani Total Gas, and Adani Transmission were locked in their lower circuit of 5%. The shares of Adani Enterprises and Adani Ports fell sharply by 25% and 19%, respectively. 

Further Insights Into Adani Group Companies

The majority stakeholders of Adani Group’s listed companies are its promoters. They own a nearly 75% stake in the firms. [Except for Adani Ports and Adani Green Energy, whose total promoter holding stands at 64% and 56%, respectively] Then comes Foreign Institutional Investors (FIIs) or FPIs, who hold around 19-21% stake in each company. When a few shares are traded by these large entities, it can massively influence stock prices.

The public (retail investors) hold a meager 2-4% stake in Adani Enterprises, Adani Total Gas, Adani Ports, and Adani Transmission. Adani Green Energy and Adani Power are the only companies wherein the public has a comparatively higher stake. The public shareholding in these two firms is 22% and 6.5%, respectively.

Mutual Funds (MF) hold a mere 1-3.5% in the group’s listed companies. These are mostly in Index Funds or ETFs. On the other hand, Domestic Institutional Investors (DIIs) hardly own any stake in these firms. A major question arises here. Why haven’t MFs or DIIs invested more into Adani companies, especially when they have given exponential returns in the past year?

According to reports, seven common FPIs hold a significant stake in each of the listed group companies. However, almost 98% of investments made by these seven FPIs are in Adani firms only. It was found that none of these foreign funds have official working websites. Most of these FPIs are registered in Mauritius, a country through which large companies launder money and evade taxes. These are all huge red flags that have been brought to our attention by the recent allegations.

Clarification Made by the Adani Group

Around 3:00 pm yesterday, the Adani Group came out with a clarification on the allegations/report by ET. The notice stated that reports of NSDL freezing the accounts of the three FPIs are “blatantly erroneous”, and it was meant to deliberately mislead the investing community. It further states that the report has caused irreparable loss of economic value to the investors and the reputation of the group. The transfer agents have confirmed that the three FPI accounts were active as of June 14, 2021. [A transfer agent keeps a record of who owns the securities (stocks or bonds) of a publicly-traded company] The Demat account in which the foreign funds hold shares of the group companies are not frozen. 

Following this clarification, the shares of Adani Ports and Adani Enterprises recovered by 15% and 27% (intraday), respectively. 

Recent Developments

Following Monday’s developments, many Adani group stocks hit their respective lower circuits on Tuesday (June 15) as well. At the same time, there are some very interesting reports coming out. According to the NSDL site, the depository receipts (DR) accounts of the three FPIs are actually frozen. However, it does not mean that Adani’s clarification was untrue.

According to SEBI norms, FPIs are required to manage separate accounts for local trading and offshore instruments (such as depository receipts). However, the ‘freeze list’ of NSDL does not specify whether an account is a depository or a domestic trading account. Apparently, the depository receipts accounts of the three FPIs (mentioned in the ET report) are indeed frozen. And, the local accounts are still active.

The reports further state that the DR accounts of the three FPIs were frozen as part of a regulatory action carried out by SEBI in a 2016 Global Depository Receipts (GDR) case. The market regulator had found fraudulent activity in the GDR issues of over 50 Indian companies.

As the fundamentals of Adani companies are unchanged or unaffected, investor sentiments would remain (largely) positive. However, there are still a lot of questions left unanswered. Did the Adani Group really carry out malpractices to drive up share prices? Or, was all this a coordinated attack on them? Let us look forward to seeing how the situation unfolds in the days to come.

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