Adani stocks only go up
Or how a hypothetical marble manufacturing company could increase its share price
A simple yet accurate way to look at the stock market is that the prices of the shares of companies go up when more stock is wanting to be bought than there is available to be sold. If I want to buy 80 shares of a toy marble manufacturing company, but there are only 30 on the market to be sold, I have to keep increasing the price I’m willing to pay for the shares of said marble manufacturer (maybe I think marbles are the future of the gaming industry) until I reach a point where I can convince enough people who already own those shares to sell them to me.
That is how price discovery works. I want to buy, you want to sell. There will be some price that you feel is a good sell and I feel is a good buy. When there are enough buyers and sellers, convincing is usually never a problem. I can buy (or sell) a stock in large volumes without moving the price of the stock too much. That’s what we call a “liquid” stock. I can buy a large amount of marble manufacturer shares, and you can sell a large number of shares, without us having to convince the other about what price is apt.
This is the regular way stock markets work, especially when shares of big companies that make billions of dollars are traded.
Now, if you’re the owner of this marble manufacturing company, an easy (not super easy to execute, but reasonably easy to imagine) way to make sure that the price of your shares go up is by buying them up yourself. That way, when there are actual buyers on the market, the price will keep going up because you own all the shares and you won’t sell them.
This isn’t actually easy to do (I did mention it’s only easy to imagine). For one, all market regulators—SEBI in India’s case—require that the owner not own above a certain threshold if the company is listed. 75% is the figure that SEBI likes for companies in India. Second, buying up your own shares for the explicit reason of increasing their price can be seen as market manipulation. Which is super, super illegal (but difficult to prove), even if probably common in the Indian markets.
One way to bypass all of the regulator’s BS is to just pay someone else to buy up your shares and hold on to them. You would then own about 75% of the company, ~20% would be with the entity that you paid, and the remaining 5% is what would actually be traded on the markets.
This is not a liquid stock. You might be the largest marble manufacturer in the world, and marbles might be the next hot obsession of crypto bros who would be minting NFTs on your marbles, and you might have billions in revenue, but a stock which has only a small number of shares that can be traded on the market is not liquid. There will be situations where the buyers have to “convince” the sellers to sell, pushing the price up significantly every time. Over time, these pushes and nudges can amount to a lot and might even make you the (second) richest person on the planet.
Entirely coincidentally, India’s gem Gautam Adani recently became the second richest person in the world, and a lot of his companies have very few shares trading on the market.
For instance, Adani Enterprises has only about 6% of its shares owned by the public1. Adani Transmission has about 2.7%2. Adani Enterprises is now priced at about 17X its price in Jan 2020, while Transmission is at 11X. Adani owns 5 other listed companies (apart from 2 cement companies he just bought), most of whose public ownership is similarly low and price rise similarly exceptional3.
More importantly, there are a number of shady entities holding Adani company shares extremely shadily (I have to emphasise on shady because of just how suspect the whole situation is). From Andy Mukherjee at Bloomberg -
Everyone ought to hear from the managers of the Elara India Opportunities Fund, which has amassed $4.2 billion — practically all of its assets under management — from three stocks: Adani Transmission Ltd., Adani Enterprises Ltd., and Adani Total Gas Ltd. APMS Investment Fund Ltd., whose $3.6 billion portfolio also includes Adani Power Ltd., has done it with four.
There are three more of these Mauritius-based entities among major shareholders: Cresta Fund Ltd., LTS Investment Fund and Vespera Fund Ltd. A sixth, Albula Investment Fund Ltd., has exited Adani firms, with its portfolio shrinking to about $240 million from $1.6 billion in December, according to Bloomberg data. Between them, these publicity-shy investors own a combined $12 billion of Adani stock.
One can understand these funds’ reluctance to be in the public glare: Before they lucked out with Adani, four of them — Elara, Cresta, Albula and APMS — held significant stakes in two companies whose founders fled India and have since been probed for money laundering; another went bankrupt; and a fourth was liquidated after sparring with the Ethiopian government, Bloomberg News reported in July last year.
Let’s pick up on what’s happening. There are some entities which are registered in Mauritius. Nearly all of their money is in Adani stocks. In the past, their money was in shady companies whose founders either fled the country and may have been money laundering or fought with their government. There’s more shady stuff. All of these Mauritius entities are registered at the same address (or the same street).
If I were a marble manufacturing company destined for greatness, but I wanted to expedite this greatness by pushing the stock price up, I would not get 4/5 shady Mauritius-based funds to own large chunks of my company. What I would do, instead, was to get squeaky clean Mauritius-based funds (they have to be Mauritius-based don’t even ask me why) to own reasonably small chunks of my company. (Reasonably small here implies <1%, because over that their names would have to be disclosed.)
Then my company’s stock price would balloon and I wouldn’t have annoying journalists asking “why do these funds have all their money in your stocks” or “aren’t you concerned by just how fucking shady these funds seem to be”. This seems to me like one of those easy-yet-annoying-to-do things that never get done. Like using different passwords across websites. It isn’t a problem until it is.
Adani, of course, doesn’t need to worry about any of this. He’s not a marble-manufacturing company that’s attempted to artificially inflate their share price.
But let’s say if he were.
If Adani happened to be this futuristic marble company that I keep referencing: what does he have to gain apart from an ego boost by showing up on a leaderboard?
—Cheap loans.
If Adani were this marble company, he would get cheap loans. And that would make his companies a house of cards.
More about this in the next post. (Link here.)
Public here does not necessarily imply that these shares aren’t owned by those close to Adani. Just that it isn’t one particular entity owning a whole lot.
Also notable is that Indian mutual funds that are actively managed don't own Adani shares for the most part. They own very less (~0.1%) or not at all (Adani Ports is an exception). If they turned up in the market to buy, it would push the price even further up.
Adani Ports is an interesting exception. Its price has gone up “only” 3X and unknown foreign funds don’t have as much of a holding in the company.
Loved your analysis here, i think you have been proven right once more https://hindenburgresearch.com/adani/ , of Adani Corporations being a "House of cards"