After years of booming valuations that propelled its founder Gautam Adani to briefly become the world’s second-richest person, the Adani Group’s stocks are in free fall. On Wednesday, Adani was forced to abruptly call off its Rs 20,000 crore follow-on public offering – intended to raise money to repay debt – even after it was fully subscribed. The collapse started last week after an American firm called Hindenburg Research accused the conglomerate of manipulating stocks and improperly using tax havens.

The crash in Adani’s stock value, the consequent struggles to raise money and the possibility of a default, experts say, could potentially hurt the Indian economy and damage the reputation of its institutions.

Here’s how the crisis unfolded, how it might affect the Adani Group and the Indian economy at large.

Crisis calendar

January 24 Hindenburg Research publishes a report alleging that the Adani Group is pulling off the “largest con in corporate history”. It claims the Indian conglomerate has been involved in stock manipulation, accounting fraud, improper use of tax havens and money laundering.

January 26 The Adani Group dismisses Hindenburg’s allegations as “maliciously mischievous” and threatens legal action. Hindenburg dares it to file a lawsuit.

January 27 The follow-on public offering of Adani Enterprises, the group’s flagship, opens to a muted response and is subscribed just 0.01 times that first day. By now, the Adani Group has lost $48 billion in value.

January 29 In a 413-page response to Hindenburg, the Adani Group calls the allegations a “calculated attack” on India. Its invocation of nationalism receives support from people aligned with the ruling Bharatiya Janata Party, which in turn is perceived to have close ties with the conglomerate. Hindenburg quickly issues, saying the conglomerate hasn’t answered its allegations.

January 30 The Adani Group’s market losses balloon to around $65 billion despite its attempts to assuage investors.

January 31 The follow-on public offer of Adani Enterprises closes, oversubscribed 1.12 times.

February 1 The group withdraws its follow-on public offer saying it wants to protect investor interest amid the “unprecedented situation and the current market volatility”. The investors will get their money back, it says. Media reports claim that companies linked to Adani picked up shares in the follow-on public offer. The stock crash wipes out a substantial chunk of Gautam Adani’s personal wealth and sees him lose his position as Asia’s richest man. In Australia, where the Adani Group is involved in the controversial Carmichael mining project, the market regulator says that it will review the Hindenburg report.

February 2 As the Adani empire’s market losses exceed $100 billion, the market regulator, the Securities and Exchange Board of India, launches an investigation into the stock crash and Hindenburg’s allegations. The Reserve Bank of India reportedly tells banks to provide details of their exposure to the conglomerate. In Parliament, the Opposition demands an investigation by a Joint Parliamentary Committee or a panel constituted by the Supreme Court.

Ratings downgrade

The valuations of Adani’s companies have rocketed over the past three years. Between April 2020 and August 2022, the value of its stocks rose nearly 4000%. Now that the stocks are plummeting, these companies are facing a downgrade in ratings.

Bloomberg columnist Andy Mukherjee points out that some of the group’s securities that Credit Suisse had assigned a lending value of 75% are now rated zero. This makes it difficult for the conglomerate to raise money. Its lenders are either asking for more collateral or are scrutinising the value of the companies’ debt to lend against. The American investment bank Citigroup has already stopped giving loans to the group against securities.

The botched share sale of Adani Enterprises has only added to this heightened scrutiny. There are reports that at least two companies allegedly linked to the Adani Group underwrote and likely bought in the share sale. An underwriter pledges to buy the unsold shares in a share sale. These two companies were accused by Hindenburg of helping the Adani Group engage in corporate malfeasance. The conglomerate denied the links.

The oversubscription of the Adani share sale was assisted by rich Indian individuals at the last minute, after retail investors stayed away, reported Bloomberg, the Financial Times and The Economic Times. Retail investors are individuals or non-professional investors.

Potential spillover

It is not only Hindenburg that has made such allegations against the Adani Group. In August 2022, American finance and insurance company Fitch Group warned that the group had taken on too much debt and raised the possibility of a default “in the worst-case scenario”. However, the report also said the Adani Group draws “comfort” from its strong relationships with banks and India’s government. Indeed, the conglomerate has been described as being “too big to fail” for the Indian government.

In December, Quartz argued that any Adani company defaulting would damage not only the stock market but also the wider Indian economy. “The taxpayer will be hit, additionally, by her indirect exposure to the group, through LIC and the state-owned banks,” the business news platform said. “A bailout would limit the damage. That too would be funded by the public exchequer, but it would be unavoidable if the government decides that the Adani Group has indeed grown too big to be allowed to fail.”

The suggestion that the Modi government will have to act if the Adani Group needs rescuing is driven by concerns that the crisis will potentially spill over onto the Indian economy at large.

Not without reason. The stock crash has raised concerns about the high exposure of the public insurance company, LIC, to the Adani group and how it could risk the savings of middle-class Indians. The insurer has sought to alleviate such concerns saying its total exposure in the Adani Group companies is less than a percent of its total assets under management at book value, referring to the total market value of investments that an entity controls.

Some commentators, such as Bloomberg columnist Mihir Sharma, have raised concerns about whether the Adani Group, following this crisis, can deliver on key infrastructure projects with which it has been entrusted.

Reputational damage

Sharma also pointed out that one factor that distinguishes India from other emerging nations is the transparency of its markets and the quality of its market regulator. This crisis, he notes, is challenging that image. As a consequence, the Modi government cannot afford to mismanage the crisis.

On a similar note, Wall Street Journal columnist Megha Mandavia noted that the Indian government’s handling of the crisis will shape “foreign investors’ perception of the country’s attractiveness”. “Foreign investors, who hold a large chunk of the conglomerate’s sizable debt, may be reluctant to keep financing it until they are confident that the regulator has thoroughly assessed Hindenburg’s claims,” she argued.

The British Financial Times on Monday described the crisis as a “defining test for India Inc”. In its daily investment column on Wednesday, the newspaper said the relationship between Indian politicians and the business elite “is worryingly close”. However, it argued, “India can dispel negative interpretations of such ties by investigating the Adani affair thoroughly and with extensive public disclosure.”