Billionaire Gautam Adani’s Mundra power plant in India, which has been burning through money for years, encapsulates the questions surrounding Adani’s empire. Despite being a crown jewel of his power company, the Mundra plant has more liabilities than assets and has racked up $1.8 billion in losses. Adani has assured investors and lenders that profits will come soon, but his auditor and accounting experts cannot fully make sense of the numbers underpinning this claim.
The battle between Adani’s sprawling empire and investors who are swayed by Hindenburg Research’s claim that the tycoon is behind “the largest con in corporate history” is playing out in spectacular fashion. At the core of investors’ skittishness is the debt-fueled and intertwined nature of how the Adani empire bankrolls its titanic expansions.
Companies in Adani’s conglomerate lost as much as $153 billion in combined market value after Hindenburg’s accusations of stock manipulation and accounting fraud. Adani has denied the allegations, but his personal wealth has tumbled by more than half to $49.8 billion, according to the Bloomberg Billionaires Index.
The Mundra Thermal Power Plant exemplifies Adani’s balancing act, where a single asset write-down could have cascading ramifications. Alastair Lawrence, an associate professor of accounting at the London Business School, believes impairment would have been prudent in light of the circumstances.
Mundra’s debt appears designed to shield Adani Power from extraordinary write-offs, regardless of the unit’s losses, according to experts. Adani Power has not responded to detailed questions for this story.
Adani entered power generation almost 15 years ago, quickly amassing enough plants to become one of India’s largest suppliers. Mundra, the flagship, was built near the Gujarat coast in western India, its gateway for global commerce. When operating at full capacity, it can power more than 5 million rural homes.
Inside Adani Power sits a sub-entity resembling an investment company, identified in financial statements as “Standalone.” Through this vehicle, Adani Power lent more than $600 million to Mundra, delivered through a special kind of unsecured debentures. The move offered Adani a crucial advantage, according to Miguel Angel Minutti-Meza, the accounting department chair at the University of Miami’s Herbert Business School.
The debentures appear custom-made to avoid writedowns, no matter if Mundra’s losses kept piling up. This is key for Adani Power because “a large impairment may trigger a series of defaults” depending on its loan terms, according to Minutti-Meza.
These perpetual debentures count as equity, not debt, in financial statements, improving Mundra’s debt-to-equity ratio. Since it’s not on the hook for interest, “Standalone” doesn’t have to set aside a cash reserve in case the plant misses a payment.
None of the experts who spoke to Bloomberg News raised questions about the legality of the debenture arrangement. And SRBC, an Indian affiliate of London-based EY, gave the Mundra subsidiary a clean opinion in its annual report.
Adani’s ambitious expansion strategy has put the tycoon in the crosshairs of investors and regulators alike. While India’s government has expressed support for Adani’s plans, the Securities and Exchange Board of India and the National Stock Exchange have asked Adani Group companies to clarify news reports of a freeze on the accounts of three of the group’s foreign funds.
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