In recent years, some investment pundits promoted Indian stocks as an alternative to “uninvestable” Chinese equities. That thesis has taken a heavy blow from the Adani affair. This is the latest in a string of scandals to rock Indian markets.
Short seller Hindenburg Research has alleged that Adani manipulated its stock price and engaged in accounting fraud. The company, run by tycoon Gautam Adani, vehemently denies the claims. It completed a $2.5bn share sale even as the government delivered a budget intended to bolster the broader economy.
Nevertheless, shares in companies within the highly leveraged industrial group extended their losses on Wednesday. Shares in Adani Enterprises, the group’s flagship company, fell 25 per cent. Adani Total Gas dropped by its daily limit.
Adani group stocks have a combined weighting of just 6 per cent of the MSCI Standard index. But their influence on foreign investors is proving significant. Foreign funds have sold a net $1.5bn in Indian stocks.
Such retreats recur in India. More than a decade ago, corruption scandals in the telecoms industry sparked an extended sell-off by global funds. Investors also jumped ship when regulators fined Reliance Industries and chair Mukesh Ambani for irregularities involving a share issue. Shareholders also flinched when Infosys, a big technology services group, investigated whistleblower complaints.
India is a vast, vibrant country packed with talented people. But it suffers from foreign perceptions that high levels of corruption encourage financial chicanery. These are sometimes stereotyped and unfair — developed economies such as the US and UK have skeletons in their own closets. However, the relationship between politicians and the business elite is worryingly close in India.
India can dispel negative interpretations of such ties by investigating the Adani affair thoroughly and with extensive public disclosure. If it does not, foreign investors will draw their own conclusions.
The tendency of the Indian economy to undershoot bullish expectations is partly explained by the deadening effect of corruption. Economic growth is expected to decelerate in the year to next March, to the slowest level in three years. India plans to sell a record $190bn of bonds to fund its huge budget deficits.
Foreign investors dumped more than $16bn of equity, a historic record, in Indian stocks last year. But even after that exit, the benchmark Sensex trades at a pricey 3 times book, double that of Chinese and Japanese counterparts. Loose capital will instead favour investments in China.
Source: Financial Times
