India’s Adani group has been steeped in a crisis after the US short-seller Hindenburg Research alleged that the conglomerate has been involved in a slew of financial irregularities. While the episode is still evolving, Asia Insurance Review takes a look at what the impact might be on the insurance sector.
India’s infrastructure and energy conglomerate Adani group has been accused by the US-based Hindenburg Research (HR) of multiple financial irregularities, which include artificially inflating its financial results, mis-stating its revenues and profits and overstating the value of its assets. These and more allegations were made in a report released by HR in January 2023.
HR describes itself as a forensic financial research company and ‘activist short seller’. It focuses on analysing accounting irregularities, undisclosed transactions, illegal/unethical business or financial reporting practices, among other issues.
Shares tumble
The publication of the Hindenburg report was followed by a significant drop in share prices of Adani group of companies. On 1 February the group companies lost over 28% value in a single day. The company later abruptly decided to abandon its $2.42bn follow-on public offering (FPO).
Amidst fears that with the rout of the shares of the group, the holdings by Life Insurance Corporation of India (LIC) would be impacted very badly, the Indian government assured the Indian parliament that all investments of LIC are carried out strictly as per the statutory framework of the Insurance Act, 1938 and the IRDA Investment Regulations, 2016 and are guided by a detailed governance mechanism.
In a written reply in Rajya Sabha (upper house of Indian parliament) on 7 February 2023 the union minister of state for finance Bhagwat Karad said the total purchase value of equity of the Adani group companies by LIC was INR301.27bn ($3.65bn).
Mr Karad said the market value for the same at the close of market hours on 27 January 2023 was INR561.42bn ($6.8bn).
LIC’s exposure within limits
“The total assets under management (AUM) by LIC are over INR42000bn ($508bn) as at 30 September 2022. Therefore, LIC’s exposure in the Adani group, as of date, is 0.975% of LIC’s total AUM at book value.”
According to media reports LIC’s investments in the impacted companies account for over 98% of the entire insurance industry’s investment in the conglomerate.
Several conjectures have been raised that there have probably been some systemic failures in governance and long-term corrupt practices at the Adani group. Will it merit invalidation of any insurance covers of the group?
At the moment, the Hindenburg report is more in the form of allegations and except for market loss there have been no other losses. New York University dean of valuation professor Ashwath Damodaran has said that there is no malfeasance, but only exploitation of inherent systemic weaknesses in India’s capital markets by the Adani Group.
Therefore, wrongful action on the part of either the group or the insurers has not yet been proven, the burden of which would rest on whoever brings action against the group.
Indian general insurers’ exposure
India’s five public sector general insurers have an exposure of 0.14% of their combined assets under management to the Adani group companies according to the information provided to the Indian parliament on 13 February 2023.
The Indian minister of state for finance Bhagwat Karad informed the Lok Sabha (the lower house of Indian parliament) on 13 February 2023 that as per the data received from the public sector general insurance companies, the total exposure in Adani Group of companies as on 31 January 2023 is INR3.48bn ($42.14m) which is 0.14% of the total AUM of all the five state-run Indian general insurance companies.
Liability claims can kick in
The situation, however, seems ripe for a cocktail of liability claims. Speaking with Asia Insurance Review, insurance broker and commentator Hari Radhakrishnan said, “The following categories of insurance claims can possibly be triggered in the present case.
- Directors and officers (D&O) liabilities claims against the directors of the group by minority shareholders as per relevant provisions of Companies Act of India pertaining to mismanagement of the company. This can be brought by individual shareholders or as a class action by a group or class of shareholders.
- Adani Enterprises had issued a follow-on public offering (FPO). This offer was fully subscribed but was subsequently cancelled and monies received were returned to the subscribers.
Assuming the FPO was covered under public offering of securities insurance (POSI), there could be prospectus liability claims for wilful non-disclosure and/or misrepresentation of information.
Mr Radhakrishnan said, “Such claims could be against the issuer of shares, which is Adani Enterprises or the officials responsible for the issue employed by the Adani Enterprises, as well as the underwriters to the issue for their professional misconduct.”
- It is alleged that the audits of the firms were carried out by inexperienced auditors. There could be professional indemnity claims against the auditors for failure/negligence to perform due diligence and misconduct.
- As the group has floated publicly traded dollar bonds in global markets, class action securities claims in other countries, such as the US, could arise, considering that the value of such bonds have dipped and some bankers like Credit Suisse have started refusing to take them as collateral.
Mr Radhakrishnan said, “It would be instructive to note that Nikola Corp of the US that was targeted by HR before Adani group, faces class action suits and had to pay fine to the US Securities and Exchange Commission for settling securities fraud claims.”
Accusations not above suspicion
He said, “Hindenburg, however, has a commercial motive behind the expose and there its actions are also not above suspicion.”
He said all the relevant insurance policies, such as D&O and POSI, usually cover alleged or actual wrongful acts. It is not necessary that there has to be proof of wrongdoing beforehand to institute legal action as discovery process is also involved. The policies pay for defence costs and are subject to final and non-appealable adjudication language.
“The matter is still at a preliminary stage and still evolving. In the coming days more facts could come to light. So it is que sera sera for the time being,” Mr Radhakrishnan said. A
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Did Adani exploit ESG investors?
KLP, Norway’s largest pension fund, has divested its entire holding in the conglomerate’s green energy projects amid concerns that it might inadvertently have helped finance the group’s ‘not-so-green’ activities, including helping to finance the Carmichael coal mine in Australia.
According to media reports, more than 500 funds registered in the EU with ESG promotion as a part of their mandate, also hold Adani stocks, either directly or indirectly.
Is ESG a weakness?
Professor Aswath Damodaran in his blog on 4 February 2023 said, “There is another seam or weakness in the global economic setting that Adani Enterprises exploited, and that is ESG … If you review the Adani website and sales pitch, it is quite clear that the company learned to play the ESG game well, creating an entire ESG universe to underpin its companies and exploiting the green bond market, presumably for its green energy business.”
Ratings under review
S&P Global Ratings has put the ESG evaluation of a couple of Adani companies ‘under review’ in February 2023. It will keep a close watch on the developments, including any investigations by the Indian regulators and any additional disclosures by the Adani Group.
Adani Green is included in several ESG and climate indices of Morgan Stanley Capital International and the company has been given a rating of A by it. It will review the weights of Adani Total Gas and Adani Transmission at the next review of the indices in May 2023.
Insurers keep away
At the time of writing, 45 insurers have decided to keep away from the Adani Group’s Carmichael coal mine as a part of their ‘keep away from fossil fuels’ policy. Some insurance companies, however, continue to lend their support to coal and other fossil fuels.
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