(Bloomberg) -- The pressure on Gautam Adani to swiftly address concerns over his conglomerate's financial health intensified as the brutal rout in its stocks wiped out more than half the value of his companies since short-seller Hindenburg Research's report.
About $118 billion was erased from the market capitalization of his 10 stocks since US-based Hindenburg claimed last week that offshore shell entities were used to inflate revenues and manipulate stock prices. Flagship Adani Enterprises Ltd. swung between a loss of 35% and a gain of about 7% on Friday amid a series of big trades. Six of the other nine stocks declined.
The slump has worsened and looked unstoppable this week. Losses in some of the stocks have reached more than 50%, including a 60% plunge for Adani Enterprises, since Hindenburg published its report. The short seller said at that time that seven listed firms of the group are 85% overvalued even by taking the their financial metrics at face value.
The extended weakness reflects worries about Adani's access to funding after the tycoon scrapped a key stock offering this week, and as long-held concerns about the group's debt were propelled onto the global stage by Hindenburg. The embattled tycoon is in talks with creditors to prepay some loans backed by pledged shares, as some banks stopped accepting the securities of the group that spans from ports to energy as collateral in client trades.
“Investors are not just interested in clearing pledges, they want concrete plans and actions,” said Sameer Kalra, founder of Target Investing in Mumbai. “The use of every rupee on balance sheet is critical now. There are a lot of stakeholders.”
The crisis of confidence in Adani has become a national issue with lawmakers disrupting parliament for two days to demand answers from Prime Minister Narendra Modi's government, given how closely his interests are intertwined with the nation's growth plans. Government officials have sought to downplay the impact, even as the opposition Congress Party plans nationwide protests to highlight the risks to small investors.
Hindenburg Research last week accused the group of “brazen” market manipulation and accounting fraud, claiming that a web of Adani-family controlled offshore shell entities in tax havens were used to facilitate corruption, money laundering and taxpayer theft.
The conglomerate has repeatedly denied the allegations, called the report “bogus,” and threatened legal action. Adani gave a video speech on Thursday stating that the group's balance sheet is healthy.
Fitch Ratings said Friday that there's no immediate impact on the credit profile of the Adani companies it rates following the Hindenburg report. It also doesn't expect material changes to the forecast cash flow.
In a reprieve for Adani, the group's bonds rallied Friday after Goldman Sachs Group Inc. and JPMorgan Chase & Co. told some clients that the debt can offer value due to the strength of certain assets. All 15 dollar debt securities, some of which had fallen into distressed pricing, advanced.
At least 200 financial institutions have had exposure to Adani Group's $8 billion in dollar bonds, according to data compiled by Bloomberg based on the company's most recent filings. BlackRock Inc, New Jersey-based Lord Abbett & Co. and New York-based Teachers Insurance & Annuity Association of America were among the big holders.
“The Adani stocks and bonds have different investor bases with limited institutional involvement in the stocks. Equity valuations in the group were hard to justify on fundamentals even before the shortselling report was issued,” said Willem Glorie, portfolio manager at LGT Capital Partners. “Bond investors may still see value at low prices as the conglomerate controls large parts of strategic infrastructure with an underlying business that has potential.”
Adani Enterprises rebounded to trade about 2% higher as of 2:59 p.m. in Mumbai after at least 11 trades of more than 100,000 shares each changed hands. Such volatility is set to persist, with the aggregate options volume surging and record highs seen in the open interest of both puts and calls.
“It's more of a dead-cat bounce,” said Suniil Pachisia, a strategist with Mumbai-based Pratibhuti Vinihit Ltd. “Till the time the points raised by Hindenburg are not clarified by the company, it will be challenging to trade in the shares.”
India's biggest stock exchanges placed six Adani companies, including the flagship, on a watchlist for additional trading scrutiny — a measure that's typically applied to highly volatile stocks.
Contagion from the group's stock meltdown has helped push the MSCI India Index to the brink of a technical correction, down nearly 9% from a December peak.
Banks have been tightening scrutiny on Adani companies' securities. Units of Credit Suisse Group AG and Citigroup Inc. earlier this week stopped accepting some securities issued by Adani's companies as collateral for margin loans to wealthy clients.
The conglomerate is said to have pledged 5.5% of its listed units' shares overall in loans.
The fallout has already led to the removal of Adani Enterprises from the Dow Jones Sustainability Indices. Jo Johnson, a former Conservative minister and brother of former prime minister Boris Johnson, has stepped down as director of a UK firm named by Hindenburg in its report on Adani.
Adani's proposed loan prepayment would see lenders release some of the stock in the group's companies that was pledged as collateral, Bloomberg News reported, citing a person with knowledge of the matter. The Indian group hasn't faced margin calls on these pledges and is seeking the prepayment proactively, the person added.
The billionaire's backers include Citigroup Inc., Credit Suisse Group AG and Barclays Plc. They are among banks pursuing a range of options to curb the risk of losses.
“Contagion concerns are widening, but are still limited to the banking sector,” said Charu Chanana, a strategist at Saxo Capital Markets. “The focus remains on further risks of index exclusions, while a coherent response on the fraud allegations from the Adani Group is still awaited.”
--With assistance from and .
(Updates with Fitch report in ninth paragraph, and value of dollar bonds in 10th paragraph)
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