Tuesday, January 31, 2023

CRIMINAL CAPITALI$M

Billionaire Gautam Adani Calls on India 

for Help to Save His Empire


Adani and his companies are facing accusations of fraud
from a New York short-seller, threatening the group's shares
 and his fortune.

Billionaire Gautam Adani is under siege. 

Since Jan. 24 Asia's richest man has faced serious allegations of fraud, money laundering and price manipulation that threaten to take away much of his fortune.

Indeed, the New York investment firm Hindenburg Research has launched an offensive against one of the largest Indian conglomerates.

"We have uncovered evidence of brazen accounting fraud, stock manipulation and money laundering at Adani, taking place over the course of decades," Hindenburg wrote in a report published on Jan. 24.

"Adani has pulled off this gargantuan feat with the help of enablers in government and a cottage industry of international companies that facilitate these activities."

The report describes a galaxy of shell entities based in tax havens -- the Caribbean, Mauritius and the United Arab Emirates -- controlled by the Adani family.

The short-seller claims that the conglomerate has used shell companies in tax havens to boost its revenue and manipulate the stock market price of its various entities. As a result, the firm shorted stocks of the Adani conglomerate through U.S.-traded bonds and non-Indian-traded derivative instruments. 

This means that Hindenburg Research, a well-known short-seller, is betting on a short-term drop in the prices of these equities.

These accusations come as the Adani empire seeks to attract the general public and foreign institutional investors to a $2.5 billion offering.

'A Calculated Attack on India': Adani

Hindenburg's report caused a stock-market rout for the entities making up the Adani conglomerate on the Mumbai stock exchange. In total, the Adani empire lost $68 billion in market value during the three stock market sessions following the publication of the Hindenburg report. 

Aware that its two first declarations failed to allay the concerns and questions raised by Hindenburg, Adani, 60, has just pulled out the patriotism weapon.

"This is not merely an unwarranted attack on any specific company but a calculated attack on India, the independence, integrity and quality of Indian institutions, and the growth story and ambition of India," Adani said in a 413-page report. According to the company, the report answers most of the questions posed by Hindenburg on Jan.29.

In this report, the conglomerate repeatedly says that Hindenburg does not understand how Indian institutions work. It suggests that Hindenburg simply does not understand India. 

The company is reaching for nationalism in the hope of undoubtedly provoking a surge of sympathy among the local population and the authorities. The word "Indian" comes up regularly in Adani's 413 response pages.

"The queries make reckless statements without any evidence whatsoever and purely on unsubstantiated speculations without any understanding of the Indian laws around related parties and related party transactions," Adani said of questions asked by Hindenburg about its governance and alleged malpractices. 

"The assumption that the entities, as stated in the report, are related to Adani listed entities, is imaginary, vague and unsubstantiated and flows only from a lack of understanding by Hindenburg of the Indian laws, regulations and accounting standards," the company also said.

Adani 'Stoked a Nationalist Narrative': Hindenburg

"Hindenburg Research does not appear to have any understanding on matters of Indian law or accounting standards and yet makes claims of entities being undisclosed 'related parties' with no understanding of what constitutes a related party."

In addition to accusations of ignorance of Indian institutions, Adani also does not hesitate to accuse the New York firm of snubbing India.

"Hindenburg deliberately ignores Indian legal processes and regulations in their insinuations against us," Adani said.

The short-seller sensed the strategy.

"Fraud cannot be obfuscated by nationalism or a bloated response that ignores every key allegation we raised," Hindenburg said in a statement. 

Adani Group "predictably tried to lead the focus away from substantive issues and instead stoked a nationalist narrative, claiming our report amounted to a 'calculated attack on India.' In short, the Adani Group has attempted to conflate its meteoric rise and the wealth of its Chairman, Gautam Adani, with the success of India itself."

Adani Group is one of the most valuable companies in India. The firm holds mines, ports and power plants. It owns a dozen commercial ports and is present in coal, electricity and renewable energy. It also has diversified into airports, data centers and defense.

The company also recently entered the cement sector by buying assets of cement manufacturer Holcim  (HCMLY in India and is also looking to set up an aluminum factory. 

Adani has grown the group by acquiring companies with debt. 

Last August, the CreditSights subsidiary of Fitch Ratings warned that the Adani conglomerate was "deeply overleveraged" and may "in the worst-case scenario" spiral into a debt trap.

But two weeks later the credit-rating firm said it discovered that it had made "calculation errors" in two of Adani Group's companies. It corrected its report and removed the words "deeply overleveraged."

"CreditSights' views have not changed from its original report and we still maintain that the group's leverage is elevated," CreditSights concluded.

Adani empire tumbles again with stock sale hanging in the balance

Nivrita GANGULY
Tue, 31 January 2023 


Investors dumped more Adani shares on Tuesday, deepening the carnage at India's biggest conglomerate which has already lost around $70 billion in value after allegations of "brazen" corporate fraud.

The latest losses came as a stock sale aimed at raising $2.5 billion was due to close later in the day, with only 21 percent of the offer subscribed by midday, according to the firm.

Founder Gautam Adani, 60, was the world's third-richest person last week but has slipped to eighth position on Forbes' tracker after his personal fortune lost more than $36 billion since.

Shares in Adani Total Gas saw the biggest fall on Tuesday with trading halted for another session after diving 10 percent in the morning.

The natural gas distribution company -- of which France's TotalEnergies owns 37.4 percent -- has lost 45 percent in market value over the last week.

Adani Power and Adani Wilmar also hit their circuit breakers after falling five percent each, while Adani Green Energy traded 2.58 percent lower.

Adani Transmission and Adani Ports inched higher and the flagship Adani Enterprises regained some lost ground, trading 3.5 percent higher.

But the Adani Enterprises shares remained well below the 3,112-3,276 rupees price range set for the Follow-on Public Offer (FPO) -- making them cheaper to buy in the open market.

Abu Dhabi-based International Holding Company (IHC) gave the group a vote of confidence however, saying Monday it would buy 16 percent of the shares on offer, paying $400 million to do so.

This makes up most of the 21 percent that the Indian firm said was subscribed by midday.

- 'Brazen manipulation' -

The slump in Adani's stocks was sparked by a report from US investment group Hindenburg Research that last week alleged a "brazen stock manipulation and accounting fraud scheme over the course of decades".

Adani's conglomerate said it was the victim of a "maliciously mischievous" reputational attack and on Sunday issued a 413-page statement that it said rebutted Hindenburg's claims.

Dubbing Hindenburg the "Madoffs of Manhattan" -- a reference to crooked financier Bernie Madoff -- the statement said the researchers' allegations were "nothing but a lie".

"This is not merely an unwarranted attack on any specific company but a calculated attack on India, the independence, integrity and quality of Indian institutions, and the growth story and ambition of India," Adani said.

Hindenburg said in response to Adani's statement that "India's future is being held back by the Adani Group, which has draped itself in the Indian flag while systematically looting the nation".

It added that Adani's response only included about 30 pages focused on issues related to its report.

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Adani Debts Enter Spotlight as Dollar Bond Coupon Deadlines Loom

Ameya Karve, Divya Patil and Finbarr Flynn
Mon, January 30, 2023 

(Bloomberg) -- Scrutiny of the debts of Adani Group companies has intensified following a report by short seller Hindenburg Research, fixing investor attention in the months ahead on a string of bond interest deadlines

The conglomerate, backed by Asia’s richest person, has at least $289 million worth of dollar note coupon payments due in 2023, according to data compiled by Bloomberg. The first deadline is on Thursday, when Adani Ports & Special Economic Zone Ltd. must pay a combined $24.7 million of interest for three bonds.

There’s been no suggestion that the Adani entities would struggle to make these payments, and Adani has flagged interest coverage ratios that show it has the wherewithal to meet such obligations.

But Hindenburg’s report last week alleging “accounting fraud” along with its short position in Adani’s US-traded bonds and non-Indian-traded derivatives has put the debt in the spotlight. Some of the notes have fallen to distressed levels below 70 cents on the dollar that generally show mounting concern about creditworthiness. The securities extended declines Monday after a rebuttal by the Indian conglomerate and as Hindenburg followed with its own response.

Here’s a calendar of the upcoming dollar bond interest payments. While this list isn’t exhaustive, and excludes rupee securities, it gives a picture of some of the key dates that global investors are watching for major entities like Adani Green Energy Ltd., Adani Ports and Adani Transmission Ltd. The yields are based on prices compiled by Bloomberg for the entities’ Reg S notes.

“We believe it could take only one serious liquidity event at a single entity to trigger a negative cascade of events at other group entities which could affect the entire Adani Group,” Hindenburg wrote in its Jan. 24 publication.

Adani Group has said it’s exploring legal action over what it called a “maliciously mischievous, unresearched” report. A spokesman for the Adani Group didn’t immediately have comment about the company’s coupon payments when contacted by Bloomberg on Monday.

When it comes to bond principal repayments, Adani companies have rupee notes maturing this year in the local credit market, where price moves have been more muted. The entities mentioned above don’t have any dollar bond maturities until 2024, when Adani Ports and Adani Green are due to repay a combined $1.9 billion.

Here’s the calendar for some of those dollar note deadlines in coming years:

Already in August, the conglomerate’s financial situation made headlines after CreditSights, a Fitch Group unit, termed it “deeply overleveraged.” Adani Group denied that assessment, saying its companies had progressively reduced their debt load.

A presentation the conglomerate made in September included metrics on its ability to service interest payments that should offer investors some comfort on the looming coupon payments. The interest coverage ratio — Ebitda divided by interest expenses — ranges from about 2 to over 15 times for these entities. Typically, an interest coverage ratio of minimum two times is seen as good by credit assessors.

Broader concerns about longer-term management of the conglomerate’s debt loads, though, persist. In its September presentation, Adani listed leverage ratios for six of its firms. Five of those companies had a ratio that’s higher than the average of firms in India’s Nifty 50 index, according to Bloomberg-compiled data. Adani Total Gas Ltd. was the only one in that group that was lower.

The ratio of net debt to earnings before interest, taxes, depreciation and amortization ranged from 0.7 to 10.3 times for the six entities, compared with the Nifty 50 average of about 1.3 times.

That same report showed total cash at Adani Ports & Special Economic Zone Ltd., which Hindenburg said is “the only listed entity with significant reserves,” stood at about 40% of its net debt. Other members of the group had less favorable ratios.

--With assistance from Caroline Chu, Jacqueline Poh, P R Sanjai and Tasos Vossos.

Adani Rout Hits $68 Billion as Fight With Hindenburg Intensifies

Abhishek Vishnoi, Ishika Mookerjee and Ashutosh Joshi
Mon, January 30, 2023

(Bloomberg) -- Billionaire Gautam Adani’s 413-page attempt to restore confidence in his business empire is falling flat with investors, as stock-market losses deepen and key dollar bonds sink to fresh lows.

Shares of most Adani firms slumped on Monday despite the group’s lengthy weekend rebuttal to allegations from Hindenburg Research that the Indian conglomerate used a web of companies in tax havens to inflate revenue and stock prices even as debt piled up. The three-day selloff has now erased more than $68 billion of market value amid a share sale by Adani’s flagship that was meant to underline the tycoon’s ascension on the global stage.

While the Adani Group has portrayed Hindenburg’s allegations as baseless and an attack against India itself, the saga is reviving longstanding investor concerns about the conglomerate’s corporate governance. It also threatens to weaken broader confidence in India, until recently a top investment destination for Wall Street, and accelerate a nascent shift toward a reopening China.

“Not sure if Adani’s rebuttal is enough to assuage investor concerns. Just because things are disclosed and known does not make them right,” said Brian Freitas, an analyst at Smartkarma. “How does a group that big explain no analyst coverage and no mutual fund holdings?”

Hindenburg published a report last week accusing the Adani group of “brazen” market manipulation and accounting fraud. The wide-ranging allegations of purported corporate malpractice spoke of a web of Adani-family controlled offshore shell entities in tax havens, from the Caribbean, Mauritius and the United Arab Emirates.

Hindenburg said it had taken a short position in Adani’s companies through US-traded bonds and non-Indian-traded derivative instruments. Here’s some of their main allegations:

Identified 38 Mauritius shell entities controlled by Adani’s brother, Vinod Adani, or his close associates plus entities controlled by him in other tax havens.

The offshore shell network seems to be used for earnings manipulation.

Adani Group has previously been the focus of four major government investigations relating to allegations of fraud.

Adani Enterprises and Adani Total Gas Ltd. appear to be audited by a tiny firm, with no current website, only four partners and 11 employees, and which has audited just one other listed firm.

The auditor “hardly seems capable of complex audit work” when Adani Enterprises alone has 156 subsidiaries and many more joint ventures.

In its rebuttal published Sunday, Adani said that some 65 of the 88 questions raised by Hindenburg have been addressed in the conglomerate’s public disclosures, describing the short seller’s conduct as “nothing short of a calculated securities fraud under applicable law.” The group reiterated it will “exercise our rights to pursue remedies to safeguard our stakeholders before all appropriate authorities.”

Hindenburg then said Adani’s rebuttal ignored all its key allegations and was “obfuscated by nationalism.” The conglomerate’s statement failed to specifically answer 62 of Hindenburg’s 88 questions, the short seller said Monday, and conflated the company’s “meteoric rise” and the wealth of Asia’s richest man “with the success of India itself.”

Adani’s stocks were some of the best performers last year not just in the local market, but also on the broader MSCI Asia Pacific Index.

The selloff that began last week broadly continued on Monday, with Adani Total Gas Ltd. and Adani Green Energy Ltd. down as much as 20%. The flagship Adani Enterprises traded volatile, briefly erasing an early gain of as much as 10% before closing up 4.8%.

Still, Adani Enterprises’ shares remain below the floor price set for the follow-on equity sale. The company is seeking to raise 200 billion rupees ($2.5 billion).

Overall subscription for the share offer by Adani Enterprises, which closes on Tuesday, was at just 2% as of 16:27 p.m. in Mumbai on Monday. Retail investors had bid for 4% of the shares on offer to them, while the company’s employees bid for 12% of the shares for their category. The non-institutional part that includes wealthy individuals had been taken up 1%. Institutional investors bid for 4,576 shares, a fraction of the 12.8 million on offer.

While investors in Indian public offerings typically wait until the last day of the sale to place bids, concerns have risen that Hindenburg’s report will hurt sentiment.

There will be no change to the pricing of the additional share sale and it will proceed as scheduled, Adani Group CFO Jugeshinder Singh told news channel CNBC TV 18 in an interview.

‘Turn for Worse’


Meanwhile, a decline in the dollar bonds of the Adani Group companies quickened on Monday. Adani Ports & Special Economic Zone Ltd.’s 2027 note dropped 5 cents, Bloomberg-compiled data show.

Several bonds issued by group companies, including the 2032 note of Adani Ports and Special Economic Zone Ltd., have dropped below the 70-cents-on-the-dollar mark typically considered distressed.

Hindenburg Research’s attack on the Adani Group has also sparked a flurry of bets in the options markets, with a wide divide between those behind the short seller and others predicting a rebound in the shares.

Open interest — a measure of outstanding positions in call and put options — surged as some investors sought protection against the wild swings in the group’s shares.

“The risk-reward for Indian markets has just taken a turn for the worse,” said Charu Chanana, a strategist at Saxo Capital Markets. “Foreign investor confidence has been dented and will take time to repair, so I would be rather cautious. India anyway started this year trading at a premium to other EMs, and the Adani saga has once again questioned whether that is justified.”

--With assistance from Finbarr Flynn, Devidutta Tripathy, Anders Melin, Abhinav Ramnarayan and Bhuma Shrivastava.

Adani Backed by UAE Royals Buying $400 Million in Share Sale

Farah Elbahrawy and Bhuma Shrivastava
Mon, January 30, 2023 

(Bloomberg) --

Abu Dhabi’s International Holding Co. will invest about $400 million in Adani Enterprises Ltd.’s follow-on share sale, voicing confidence in Indian billionaire Gautam Adani’s business empire after almost $70 billion was wiped off its market value.

The funding from IHC, which is controlled by a key member of the emirate’s royal family, will represent about 16% of the offering and follows an almost $2 billion investment in Adani’s companies last year.

“Our interest in Adani Group is driven by our confidence and belief in the fundamentals of Adani Enterprises,” Chief Executive Officer Syed Basar Shueb said. “We see a strong potential for growth from a long-term perspective and added value to our shareholders.”

IHC’s investment comes as Adani seeks to restore trust in his ports-to-power business following a scathing report by US-based short seller Hindenburg Research. The $2.5 billion share sale, scheduled to close Tuesday, was supposed to cement his legacy and open his empire to individual investors and broader India. Instead, he’s had to rely on funds from existing investors expressing their support.

Hindenburg accused the conglomerate of market manipulation, accounting fraud and operating a web of controlled offshore shell entities in tax havens. Adani Group issued a 413-page rebuttal on Sunday, but its efforts to restore confidence appear to be falling flat with many investors, as stock-market losses deepened and key dollar bonds sank to fresh lows.

While Adani Group bashed the allegations, the saga is reviving longstanding investor concerns about the conglomerate’s corporate governance. It also threatens to weaken broader confidence in India, until recently a top investment destination for Wall Street.

Still, IHC — which itself has struggled to entice international investors, some of whom privately expressed concerns about a lack of transparency — is standing by the businessman.

The move builds on an April investment in which Adani Enterprises raised 77 billion rupees ($944 million) by issuing preferential shares to IHC. Adani Green Energy Ltd. and Adani Transmission Ltd. also received 38.5 billion rupees from the Abu Dhabi-based firm.

Investors including Maybank Securities Pte, Abu Dhabi Investment Authority, State Bank of India Employees Pension Fund and Life Insurance Corp. of India also plan to buy stock in Adani’s share sale. Bloomberg News first reported IHC’s interest in the offering last week.

‘Based on Facts’

On Friday, in the wake of the Hindenburg report, IHC said its business decisions are based on facts and analysis. Shares in IHC fell as much as 5.2% on Monday, before erasing losses.

With investments ranging from Elon Musk’s SpaceX, to a local fishery and Abu Dhabi’s largest property developer, IHC is at the forefront of a drive to diversify the United Arab Emirates economy and deploy its oil windfall overseas.

“Since Adani is India’s premier airport and port operator, it might be in Abu Dhabi’s flagship investment firm’s interest to bolster the existing relationship, especially since the emirate is focusing a lot on tourism, ports, and other similar businesses,” said Vijay Valecha, chief investment officer at Century Financial, a UAE-based financial consulting firm. “These factors could have played a big role in compelling IHC to invest further in the Adani Group.”

IHC, whose market capitalization has rocketed to $239 billion since 2019, is controlled by the Royal Group, a conglomerate that lists Sheikh Tahnoon bin Zayed al Nahyan — the UAE’s national security adviser and brother to the president — as its chairman. The company hasn’t been included in the global MSCI index and isn’t covered by any stock analysts tracked by Bloomberg.

IHC is watching the international market closely for new prospects, and will continue exploring further opportunities outside its traditional market this year, CEO Shueb said in the statement on Monday. It will also explore business opportunities in Europe, Africa, Asia, and South America.

India's Adani Group plans independent audit of group companies- Mint

Mon, January 30, 2023 

The logo of the Adani Group is seen on the facade of its Corporate House on the outskirts of Ahmedabad


(Reuters) - India's Adani Group is planning to hire one of the "big six" accounting firms to assess its corporate governance and audit practices following allegations of fraud by short-selling firm Hindenburg, Mint newspaper reported on Monday.

The audit will be commissioned after the group's unit, Adani Enterprises Ltd, completes a follow-on public offering, and based on its findings legal options will be sought, Mint reported, citing two people with direct knowledge of the matter.

"The audit will include eight of the group's listed firms. The independent audit report will be presented to the board, and basis the findings, the matter be taken to the court if the board of Adani Enterprises decides so," Mint quoted one of the sources as saying.

The audit will include a review of certain related party transactions, accounting practices and compliance with corporate governance standards at the firms, the report said, adding that it will also attempt to check whether Hindenburg's allegations are correct.

Adani did not immediately respond to a Reuters request for comment outside regular business hours.

Separately, Indian bourse National Stock Exchange of India (NSE) revised the circuit limits on Adani Transmission Ltd , Adani Total Gas Ltd and Adani Green Energy Ltd to 10% from 20%, according to the bourse's website on Monday.

These limits are set by the exchange to prevent large movements in the price of stocks in a very short time.

The research report by Hindenburg last week accused the conglomerate of improper use of offshore tax havens and flagging concerns about high debt, eroding $65 billion of the group's combined market value.

Adani on Sunday issued a 413-page rebuttal to the Hindenburg report, saying it complies with all local laws and had made the necessary regulatory disclosures.

Adani Enterprises' $2.5 billion secondary share sale, launched on Jan. 27, closed its second day amid weak investor sentiment. The stock closed at 2,892.85 rupees, 7% below the 3,112 rupees lower end of the offer price band. The upper band is 3,276 rupees.

(Reporting by Juby Babu in Bengaluru; Editing by Anil D'Silva)

Indian lender PNB has 70 billion rupees exposure to Adani Group -MD

Mon, January 30, 2023 

People walk past Punjab National Bank's Brady House branch in Mumbai
In this article:

MUMBAI (Reuters) - India's Punjab National Bank has a total exposure of 70 billion rupees ($859.30 million) to Adani Group, but there is currently no worry pertaining to those accounts, the state-run lender's managing director and chief executive said on Monday.

Last week, U.S. short-seller Hindenburg Research flagged concerns about Adani Group's debt levels and the use of tax havens. Adani Group has said that it complies with all local laws and has made the necessary regulatory disclosures.

"Out of 70 billion rupees, around 25 billion rupees is related to Adani's airport business," PNB CEO Atul Kumar Goel told reporters at a virtual press conference after the company's quarterly results.

"Whatever the exposure we are having is backed by cash flow."

However, the bank is keeping a "close eye" on the developments pertaining to the news flow around Hindenburg's research report, Goel said.

The bank has not given any loan to the Adani Group by pledging shares, he added.

Punjab National Bank reported a 44% drop in net profit for the October-December quarter due to rising provisions for bad loans.

The lender's asset quality improved, with gross non-performing asset ratio at 9.76% as of end-December, compared with 10.48% at the end of the prior quarter.

Its net NPA ratio was at 3.30% as of the end of December.

Goel said the bank is targeting a gross NPA ratio of around 9% and net NPA ratio of 3% by March-end. The bank is targeting credit growth of 12-13% and deposit growth of 8-9% for 2022-23. ($1 = 81.4620 Indian rupees)

(Reporting by Siddhi Nayak; Editing by Savio D'Souza)


Adani Touts Deep Global Bank Ties from Citi to Credit Suisse

Joyce Koh and Preeti Singh
Sun, January 29, 2023

(Bloomberg) -- Adani Group touted its deep local and international bank relationships in its 413-page rebuttal of the allegations of fraud by short seller Hindenburg Research.

The firm said it has strengthened access to diverse funding sources and structures, with strong domestic ties that are supported by global participation, according to a page in its statement Sunday. Some of the biggest names in banking are listed as backers of the Indian billionaire Gautam Adani, who’s also Asia’s richest man, though their exact exposure wasn’t disclosed.

In North America, there’s JPMorgan Chase & Co., Citigroup Inc. and Bank of America Corp. In Europe, the major lenders include UBS Group AG, Credit Suisse Group AG, Deutsche Bank AG and Barclays Plc, while in the Middle East, the roster is Emirates NBD PJSC, First Abu Dhabi Bank PJSC and Qatar National Bank QPSC.

Closer to home, Adani’s Asian backers include Japan’s megabanks Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc.’s main lending unit and Mizuho Financial Group Inc., as well as DBS Group Holdings Ltd. and Standard Chartered Plc. In its home base of India, the group counts on State Bank of India, Axis Bank Ltd. and ICICI Bank Ltd. for support.

In the document, Adani also said that its portfolio companies have shown successful syndication of banking transactions, citing deals such as its $10.5 billion acquisition of Holcim Ltd.’s Indian operations. For that deal, Barclays, Deutsche Bank and Standard Chartered were the underwriters, it said.

Hindenburg Research said on Monday Adani’s rebuttal has failed to specifically answer 62 of 88 questions posed by the short-seller.

Adani Risk Clouds Wall Street’s Star Emerging-Market Bet

Netty Ismail, Marcus Wong and Ronojoy Mazumdar
Sun, January 29, 2023 

The start of 2023 was meant to be India’s. The nation’s fast-growing economy and rapidly expanding equity markets had convinced money managers from Morgan Stanley Investment Management to State Street Global Advisors to call it a top investment destination.

Then came the $66 billion selloff in billionaire Gautam Adani’s corporate empire.

It’s a shock that forces Wall Street to reexamine its confidence on India’s expansion and its pro-business government, which helped the benchmark Sensex index trade last quarter at the highest in a decade versus the S&P 500. Those already-lofty valuations — combined with a scathing New York short-seller report attacking Adani Group — spotlights the contradictions within India’s runway for growth.

“India has to show its institutions are strong,” said Rajeev De Mello, a global macro portfolio manager at GAMA Asset Management, who owns the nation’s equities as part of his overweight emerging-market position. “Governance issues are a concern for all markets. But when valuations are higher than other countries, maintaining the integrity of the financial markets is critical.”

Investors have been increasingly drawn in by the narrative of opportunity in Indian assets. While bonds have been slowly making their way into global benchmark indexes, a flurry of companies have rushed to sell shares, increasing the size of the nation’s burgeoning stock market.

India’s stocks now account for more than 14% of MSCI’s emerging-market equities index, trailing only China, after it surpassed the weightings of Taiwan and South Korea last year. Morgan Stanley predicts India’s equity market is set to be the world’s third largest before the end of the decade.

But such optimism is what’s led shares in the Sensex index to trade at about 19 times their forecasted earnings, a metric that shows investors are willing to pay a premium on the prospect of stronger growth. Amid such high valuations, the Sensex index is headed for a second month of losses even as broader emerging equities rally.

Adani’s Counter

The 100-page report by short seller Hindenburg Research published last week containing allegations of stock manipulation and accounting fraud by Adani entities added more fuel to selling.

Hindenburg released its report just days before the billionaire’s flagship firm Adani Enterprises Ltd. launched India’s biggest ever primary follow-on public offering that’s seeking to raise 200 billion rupees ($2.4 billion).

In a 413-page rebuttal published Sunday, Adani Group said Hindenburg’s conduct was “nothing short of calculated securities fraud,” and said the research company was attacking India as a whole.

Read more: Adani Says Hindenburg Conduct Is ‘Calculated Securities Fraud’

For some, including Hasnain Malik, a strategist at Tellimer in Dubai, “bad behaviour by one corporate, should that prove to be case in this instance, usually does not derail confidence in the entire equity market.”

Even so, the questions surrounding one of India’s most-sprawling businesses could be what holds the nation back as it competes against China as an investment magnet.

Cheaper Alternatives

Indian stocks will be vulnerable to portfolio shifts as investors reduce their exposure to expensive assets and instead bet on China’s economic reopening its beneficiaries, such as Taiwan and South Korea, said Jon Harrison, managing director for emerging-market macro strategy at TS Lombard in London.

Carrhae Capital LLP, whose emerging-market hedge fund beat peers last year, also prefers to bet on China’s reopening. The manager will only seek bargains in Indian structural growth stories if “investors rush out of India to chase the China story,” said Ali Akay, the firm’s London-based chief investment officer.

“I personally do not think the structural story in India has changed much,” Akay said. “The increasing perception of China a strategic competitor rather than a partner has enabled India to assume the mantle of the regional bulwark against China that the West needs to build up and integrate further with.”

In an environment of heightened geopolitical risk — with the increasing rivalry between the US and China and Beijing’s mounting pressure on Taiwan — India provides a degree of “safety,” said Gaurav Mallik, chief investment strategist at State Street Global Advisors. The money manager has an overweight position in India, drawn to a growing middle class that “bodes well for consumption plays,” he said.

Mark Mobius, who spent more than three decades at Franklin Templeton Investments, plans to put more money into India, which may have already surpassed China as the world’s most-populous nation. A young and growing workforce could boost productivity if education and infrastructure investment can keep up.

“The long-term future of the market is great,” said the co-founder of Mobius Capital Partners LLP, which counts India as one of its top allocations

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