Adani Group Receives Scary Downgrade as Indian Protests Continue

Moody’s on Friday downgraded the ratings outlook on some Adani Group companies, while MSCI said it would cut the weight of some of them in its stock indexes, in the latest blow to the Indian conglomerate plunged into crisis due to a short selling report.

New York-based Hindenburg Research accused the Adani Group in a Jan. 24 report of stock manipulation and misuse of offshore tax havens, which it says obscure the extent of the Adani family’s stake in the group’s firms.

The conglomerate, which denies any wrongdoing, has since lost $110 billion of the value of seven listed companies.

The crisis sparked fears of financial contagion in India and protests in parliament where lawmakers demanded an investigation.

It also drew attention to the shrinking fortune of 60-year-old billionaire founder Gautam Adani, who was forced to delay a $2.5 billion share offering due to the market crash.

On Friday, Moody’s downgraded the outlook on Adani Green Energy’s ratings to negative from stable; Adani Green Energy Restricted Group, which represents some of its other divisions; and two subsidiaries of Adani Transmission.

“These rating actions follow a significant and rapid decline in the market value of the Adani Group’s shares following the recent release of a short seller’s report that highlighted governance issues within the group,” Moody’s said in a statement.

MSCI has reassessed the size of some Adani’s publicly traded companies and has determined that there is “sufficient uncertainty” around some investors in Adani’s companies. He began the revision after receiving feedback from market participants.

The actions of the index provider could reduce India’s weight in the MSCI Asia or Emerging Markets indexes by 20 to 30 basis points, which could result in a $1.7 billion outflow from tracking funds, analysts at Goldman Sachs said in a note.

In another index action, the S&P BSE IPO Index will exclude Adani Wilmar, the conglomerate’s consumer goods company, as part of its monthly review, according to a statement from S&P and the Bombay Stock Exchange, which did not explain the rationale for the move.

Shares in flagship company Adani Enterprises fell 4% on Friday after falling 11% the previous day as MSCI noted the change. Adani Transmission and Adani Total Gas lost 5% on Friday, while ACC shares shed 2%.

Also on Friday, India’s Supreme Court heard petitions expressing concern about the severe investor losses caused by the Hindenburg Report and said investors must be protected.

“The question here is how (to protect) … the interests of investors,” said Chief Justice of India D. Y. Chandrachud.

The stock market “is also a place where investments are made by a wide range of middle-class people,” he added, asking market regulator SEBI to present the current regulatory framework to the court and explain how investors can be protected in the future.

The court’s remarks were made in connection with the increased control over the Adani Group by regulatory authorities.

Reuters reported Friday, citing sources, that SEBI is investigating Adani Group’s ties to some investors in the aborted $2.5 billion sale of the conglomerate’s shares.

MSCI said that, in addition to the group’s flagship firm Adani Enterprises, it plans to lower the indexes for Adani Total Gas – a venture with France’s TotalEnergies – and Adani Transmission, an electricity transmission company.

It will also reduce the weight of ACC, a large Indian cement company acquired from Switzerland’s Holcim last year but not one of the top seven listed companies of the Adani group. The four companies had a combined weight of 0.4% in the MSCI Emerging Markets Index as of January 30th.

“Less free float would require passive investors to sell shares to reduce their tracking error with the index,” said Brian Freitas, an analyst with Periscope Analytics, which is published on Smartkarma.

He estimates that around $570 million will be sold through passive funds through Adani Enterprises, Adani Total Gas and Adani Transmission on February 28.

Changes to the MSCI indices will come into effect on March 1.

Hindenburg founder Nathan Anderson said the MSCI review was “a confirmation of our findings”. Adani Group did not respond to a Reuters request for comment on Friday.