A crisis at the Adani Group is clouding over India just as China reopens.
A US short seller report alleging market manipulation and fraud at the Adani Group has caused a market rout.
This is raising concerns about corporate governance in India and could benefit China.
Until recently, India was having a moment - its stock market was posting solid gains and potential investors were looking at the country as the new factory of the world to replace China.
But a major scandal engulfing Gautam Adani, the founder and chairman of one of the country's largest business empires, is clouding over India Inc right now.
The industrial tycoon's crisis started after US short seller Hindenburg Research released a scathing report last Tuesday alleging "brazen stock manipulation and accounting fraud scheme" at the Adani Group. The Adani Group has been defending itself vigorously, but Hindenburg has also doubled down on its initial report.
Still, the development has rattled investor confidence, causing a market rout with listed companies under the Adani Group losing over $100 billion in market value so far this year. The selloff has also spilled over into the broader India markets and is prompting concerns about corporate governance and debt in the country.
"The Adani case is a worrying sign for the sustainability of many Indian conglomerates which have followed in Adani's footsteps funding rapid expansions in infrastructure through large amounts of debt," Steno Research, a Denmark-based research house, wrote in a Friday report published on the Smartkarma research platform.
It doesn't help that the drama surrounding the Adani Group comes at an inopportune time - that is, just as China is reopening its borders and looking to bolster its economy after three years of pandemic-induced isolation.
China's border closures had helped India, with this shift contributing to optimism in Indian equities - which were Asia's top performers in 2022. India's benchmark Sensex and Nifty 50 indices have surpassed their 2019 levels and more than doubled from their 2020 lows during in the pandemic. In comparison, any gains on Hong Kong's Hang Seng Index and the Shanghai Composite have been relatively limited, and both measures tanked about 15% in 2022.
But, the Hang Seng and Shanghai Composite have recovered somewhat this year after China emerged from on-off pandemic lockdowns. And they could benefit further from Adani's troubles.
"Allegations of fraud at one of India's most valuable conglomerates, the Adani Group, have hastened the decline we expected in Indian equities as foreign investors rebalance their portfolios on China's reopening," Shumita Deveshwar, the chief economist for India at macroeconomic consultancy TS Lombard, wrote in a Monday note seen by Insider.
The Hang Seng Index and the Shanghai Composite are trading lower at noon Friday, but are up over 7% and 4% respectively this year so far. In comparison, India's benchmark Sensex and Nifty 50 indices are flat in early trade on Friday, but are down 1.5% and 3% respectively this year so far.
Investors are bound to intensify their scrutiny of Indian stocks, TS Lombard's Deveshwar added in her Monday note, but the country's corporate governance metrics rank better than most emerging markets including Saudi Arabia, China, and Brazil, according to a November 2022 report from the consultancy.