November 27, 2024
SINGAPORE – Indian billionaire Gautam Adani is one of the world’s richest people, heading the country’s largest conglomerate Adani Group, which in 2020 won a bid to supply eight gigawatts of electricity to a state-owned firm through its renewable energy arm, Adani Green Energy.
That deal was what Adani called the single largest solar development bid ever awarded.
But all this was called into question when US prosecutors alleged a bribery scheme in criminal and civil charges related to the bid, unsealed on Nov 20.
US prosecutors alleged that Mr Adani and seven others, including his nephew, promised to pay bribes to Indian government officials to win solar energy contracts.
The bribes are said to be over US$250 million (S$336.5 million) for solar contracts worth an estimated US$2 billion over 20 years. The prosecutors alleged that this plan was concealed as the group tried to raise money from US investors.
The Adani Group denied the charge, saying the allegations were “baseless”. It said it will seek all possible legal recourse to defend itself.
The indictment wiped out US$27 billion in market value in the listed companies under the Adani Group umbrella when it was first announced. The group has businesses spanning ports, airports, manufacturing and energy.
The saga has hit the global financial sector, affecting businesses like French oil firm TotalEnergies, which holds a stake in Adani Green Energy, as well as some 770 environmental, social and governance (ESG) funds that hold its shares.
Could lenders and investors have been forewarned of the crisis? What implications does it have on the financial sector here?
How will the Adani indictment impact investors and banks?
Investors exposed to Adani’s listed companies could feel a financial pinch if the shares lose market value as a result of reputational damage, said corporate governance expert Lawrence Loh. Professor Loh is the director for the centre of governance and sustainability at the National University of Singapore (NUS).
Adani Group saw some of its bonds being put on watch for a possible downgrade by ratings agency Fitch, Reuters reported on Nov 26.
Fitch said Adani Energy Solutions, Adani Electricity Mumbai and some of Adani Ports and Special Economic Zone rupee and dollar bonds are now on “watch negative”. Ratings on four Adani subsidiary senior unsecured US dollar bonds were downgraded from stable to negative, the agency added.
Governance advocate Professor Mak Yuen Teen of the NUS said banks that might have lent money to Adani companies run the risk of these firms being unable to service their loans due to loss of business or loss of access to capital.
It is unlikely the credit ratings of banks would be affected unless they have big exposures, he added.
But 770 ESG funds that hold Adani Green shares could see their holdings affected. According to Bloomberg, these funds oversee about US$400 billion and some of them are managed by the world’s largest asset managers.
ESG funds are investment funds that focus on companies that meet specific ESG criteria. ESG fund managers are expected to take extra measures to protect clients from risks. Such funds are also available to investors in Singapore.
Prof Mak said: “It is unfortunate that this case may be cited by opponents of ESG-investing to further push back against such investing.” He noted that Adani Green was doing rather well in most ESG ratings and that was why it was included as a component in many of such funds.
“The problem with ESG ratings is that by combining the E, S and G in one rating, poor corporate governance may be overshadowed by a company’s scores for other aspects – in Adani Green’s case, the ‘environment’ aspect,” he added.
“This is yet another example of why an assessment of a company’s sustainability must start with governance first… poor governance may ultimately still cause a company’s value to be destroyed.”
Prof Loh said: “The Adani case serves as yet another key lesson in the authenticity of ESG funds and the need for better global investment regulatory enforcement and coordination.”
How does this affect Singapore?
So far, the local banking sector’s overall exposure to Adani Group is small, according to a Nov 25 statement by the Monetary Authority of Singapore.
Adani Group runs an edible oil and food business in India through a joint venture with Singapore-listed Wilmar International. Shares of Adani Wilmar, which is listed in India, have fallen since the indictment on Nov 20.
When contacted, Wilmar International declined to comment.
Aletheia Capital analyst Nirgunan Tiruchelvam is already reinforcing his sell recommendation on Wilmar International.
Wilmar International holds a 50 per cent stake in the Adani Wilmar joint venture, with Adani Enterprises holding the other 50 per cent. Mr Tiruchelvam noted that the two companies were planning to sell a minority stake in Adani Wilmar to comply with Indian securities laws.
“The sale would have involved selling a roughly 13 per cent interest in the company, which would have been valued at about US$736 million. The recent controversy may complicate and delay these plans,” he noted in a Nov 26 report.
It was reported in October 2022 that Adani was in early discussions with investors that included Temasek and Singapore sovereign wealth fund GIC to raise at least US$10 billion to fund Adani Group’s expansion into clean energy, ports and cement businesses.
Temasek has since let go of its positions in Adani. GIC declined to comment when contacted by ST.
How can investors avoid a fallout from similar incidents in the future?
Experts said the Adani case serves as a wake-up call to the finance sector and should prompt financial institutions to reassess their risk evaluation frameworks.
This is especially relevant to Singapore as a major Asian financial hub with significant exposure to emerging market investments, said Associate Professor Ben Charoenwong from Insead Singapore.
He said the finance sector can strengthen due diligence processes by integrating research with macro views, to understand underlying governance structures.
It can also develop an ESG evaluation framework that gives enough weight to governance factors, as well-governed firms usually deliver good performance for investors, as well as less negative social and environmental outcomes.
“Third, enhance cross-border cooperation in regulatory oversight. Given Singapore’s position as a global financial hub, taking the lead in developing stronger international governance standards could be beneficial for the entire sector,” he said.
Companies should be aware of the “herding mentality” whereby firms might feel that a very large company like Adani cannot possibly get into trouble. This mentality can be strengthened by the pressure on companies to engage in the green economy, he said.
“Moreover, as investors herd into the company, other foreign investors who may have less information are also less likely to go through their own costly due diligence process and instead follow the herd,” he said.
He noted that there were already negative reports about Adani group business practices.
“It’s akin to finding a hair in your soup. While one instance might not be immediately harmful or ruin that dish’s taste, it raises questions about the entire kitchen’s operations overall,” he said.