Why the Adani indictment matters for India

On November 20, two major cases were filed against Adani Green and its executives in the US for alleged business malpractices and misrepresentations to their shareholders and investors.

The first was by federal prosecutors from the Eastern District of New York (which largely investigates financial crimes in the US), while the second was by the Securities and Exchanges Commissions, the US financial markets regulator.

These allegations must now stand scrutiny in court but the response of of the markets, media and political actors makes it clear that after American short-seller Hindenburg Research in February 2023 accused the Adani Group of pulling off the “largest con in corporate history” through accounting fraud, improper use of tax havens and money laundering, the problems around the conglomerate refuse to go away. Regardless of the verdict in the case in the US courts, these repeated incidents are bad for India’s economy.

Here’s why.

Firstly, India has been breathlessly trying to sell itself as a destination for green and renewable energy investment for over a decade now. Between umpteen investment conferences, G-20, scores of public tenders, major policy changes, legislation and more, India has taken numerous steps to try to signal to international markets that its power sector is investable and that it has recovered from the trauma of the corruption scandal around the power project headed by the US firm Enron over two decades ago.

After emerging from a crisis related to non-performing assets in Indian banks that was largely due to loans given for exuberant infrastructure investment, there was a sense that India might be on the cusp of wooing international investment at scale now.

Large American investment banks, Canadian pension funds, various Middle Eastern and Singaporean sovereign wealth fund vehicles, and a range of European investors have all been taking bigger bets on India’s renewable energy future.

Naturally, one of the largest business groups leading the charge in both public relations and fundraising, was the Adani Group. If India’s largest business group in this space has such repeated allegations against it for serious forms of business malpractice, what is the credibility of Indian power markets and India’s broader investability?

Secondly, what is the sanctity of the state-led derisking efforts of the government of India? The Solar Energy Corporation of India was set up as an intermediary between investors and state power distribution companies to facilitate the investment process in the country. This was largely a Central government response to investor perceptions that state distribution companies were too financially unstable and risky as counterparties in power contracts. Foreign investors would contract with the SECI and it would manage the risks.

From helping with land acquisition, to facilitating the signing of power purchase agreements, to tendering projects and discovering prices through auctions, the SECI has been at the forefront of India’s ambitious renewable energy push over the last decade. SECI was supposed to be a neutral market facilitator but has itself been implicated in these US indictments.

The court documents say that the SECI was unable to find state distribution companies to buy power from the Adani Group and another firm called Azure Power. As a consequence, these entities conspired to “devise a scheme to offer, authorize, make and promise to make bribe payments to Indian government officials” to get state companies to enter into power sale agreements with the SECI.

Infrastructure investment in any developing country is complicated at the best of times. If the state entity responsible for facilitating this is itself considered a risk, what hope can foreign companies and smaller companies without access to the highest levels of politics and bureaucracy have in navigating such processes?

Thirdly, India is currently risking alienating one of its most reliable long-term investors in renewable energy: Canadian pension funds. Canadian pension funds have been at the forefront of financing renewable energy in India and have had a major presence in Indian markets for over a decade. CDPQ, one of the largest pension funds in Canada, is implicated in these indictments, and its implicated executives have been terminated. In addition, the company has been cooperating with US investigations.

Canadian pension funds have invested over $55 billion over the last decade, and over a third of this money has gone into infrastructure and adjacent sectors. Between the recent diplomatic conflict between India and Canada, and now this, it remains to be seen if Canadian long-term investors remain as bullish on India. And if this is true of one of India’s most bullish long-term infrastructural partners, what can realistically be expected from others?

Finally, this brings up a broader question of whether India wants to create a good environment for doing business, or simply funnel money into companies who already have strong channels of intermediation and political proximity.

Since the early 1990s, for at least a few decades, it seemed that India was selectively embracing market characteristics, liberalising licensing processes, deepening financial inclusion, and encouraging the growth of regional entrepreneurs. As many scholars have shown, India’s recent reversal towards conglomerate capitalism and concentration of capital raises serious questions about how serious the government is about making India an equal access investment destination.

Do we care about ease of doing business for everyone, or do we want only incumbent businesses to do business easily?

Infrastructure development in places like India often involves hustling to make deals and bending a few rules. However, on a spectrum, those maneuvers are far, far away from widespread financial misrepresentation to hundreds of thousands of investors, pensioners, investment analysts and more.

Part of the bargain when courting foreign investment is at least having some semblance of respect for the rules, norms, and expectations of other countries and their financial markets. You cannot list your company on foreign exchanges, raise money in Western capital markets, make heroic promises to investors and then expect to get away with such brazen business malpractice for long.

The perils of being a publicly listed company is precisely that everyone wants to know the insides of your business, and that through disclosures you are required to tell them all kinds of details. Many large companies in India and the world remain privately held precisely because it invites lower levels of public scrutiny.

The good news is that the fundamentals of Indian energy demand remain strong; with an average about 6% electricity demand growth annually, there is a massive domestic market that wants power and is willing to pay for it.

Showing the rest of the world that India’s power and infrastructure sectors are worth investment has been a three-decade process. Incidents such as the Adani indictment and Hindenburg report erode Indian credibility immeasurably. India’s biggest infrastructure company cannot and should not become its biggest liability as well.

Showing the rest of the world that Indian markets are moving towards fairer, more transparent practices is important; empowering regulators, encouraging market entry, having time-bound bureaucratic processes are all part of this toolkit.

Those are the things we should be focusing on, rather than the top-heavy, inequitable growth we are getting a reputation for.

Rohit Chandra is an Assistant Professor at IIT-Delhi’s School of Public Policy.