When Gautam Adani, ranked 24th on the global billionaire’s list, addressed investors at the Adani Enterprises annual general meeting in July, he probably committed a Freudian slip.

“We are inter-generational holders of equity,” Adani averred, perhaps intending to cast the group in the same mould as the Tata Group, which professes to be a custodian of wealth that benefits the wider community.

But the majority owners of the ports-to-energy Adani Group are Gautam Adani and his family. They are inter-generational holders of equity in the truest sense; the family’s current $74.8 billion net worth has appreciated twenty-fold since March 2016.

What prompted Adani’s remark was the increased regulatory scrutiny of the ownership structure of his listed companies.

In May 2021, the National Securities Depository Limited (NSDL) froze the accounts of three Mauritius-based funds - Albula Investment Fund, Cresta Fund, and APMS Investment Fund — that together owned around ₹43,500 crore ($6.2 billion) equity in the Adani Group - due to their insufficient disclosure of ownership under the Prevention of Money Laundering Act.

There were also reports about another investment vehicle, the $4 billion Elara India Opportunities Fund, 97 per cent of whose assets were invested in Adani Group companies.

While the Adani Group called the media reports “blatantly erroneous” and deliberately misleading to investors, share prices of the listed Adani companies tumbled by up to 23 per cent. A month later, on July 20, Minister of State for Finance, Pankaj Chaudhary, told Parliament that the Directorate of Revenue Intelligence had launched a probe of the Mauritius-based funds.

Gautam Adani’s personal stake in the Adani Group’s six listed entities ranges from 56 per cent to 75 per cent. Stakes held by foreign portfolio investors (FPIs), including those under investigation, range from 11 per cent to 22 per cent (see graphic). Domestic financial institutions hold less than a 2.5 per cent stake in Adani Group companies, with the exception of the group’s cash cow, Adani Ports and Special Economic Zone (APSEZ), in which they hold a 15 per cent stake. Retail investor holdings are negligible at less than 6 per cent.

By retaining a majority stake and raising capital through opaque FPIs, Adani has effectively ensured that activist shareholders are unable to question the group’s inaccurate disclosures and high-risk expansion strategy that has been primarily fuelled by debt without a commensurate increase in cash flows.

EBITDA overstated

For at least two years – FY20 and FY21 – the conglomerate has been overstating its earnings before interest, taxes, depreciation, amortisation (EBITDA), an operating profit metric, by almost 10 per cent. The EBITDAs reported by the six listed companies added up to ₹24,169 crore in 2020 and ₹29,539 crore in FY21. However, as per the ‘Adani Listed Portfolio Results Compendium FY21, available at www.adanienterprises.com , the conglomerate’s EBITDA was ₹26,474 crore in 2020 and ₹32,337 crore ($4.3 billion) in FY21.

The discrepancy between APSEZ’s and Adani Transmission’s EBITDAs as per their annual reports, and the conglomerate’s results compendium accounts for the difference (see graphic).

While sound project execution capabilities and consummate political connections have helped raise vast sums of debt, glaring weaknesses in the Adani Group’s financial profile remain.

Built on debt

After the conglomerate was identified as one of India’s most indebted corporates in all three editions of Credit Suisse’s “House of Debt” reports published between 2012 and 2015, aggregate debt for the group’s listed entities has grown by 63 per cent to around ₹156,115 crore ($21 billion) in the six years to March 2021.

Three listed entities, Adani Power, Adani Transmission, and Adani Green Energy, have issued ₹16,784 crore perpetual securities, ostensibly to repay debt at interest rates of up to 11.8 per cent. Perpetual securities are hybrid securities that incorporate features of both debt and equity and are callable at the discretion of the issuer.

These perpetual capital securities appear to have been entirely subscribed to, by unlisted Adani group entities. While this may prima facie indicate Adani’s commitment to his businesses, there are concerns.

First, while Adani Power and Adani Transmission’s debt, in rupee terms, declined during FY2021, the conglomerate’s aggregate debt increased by 12.6 per cent to ₹156,115 crore. It appears that unlisted Adani entities may have financed at least part of the perpetual securities subscription through debt.

Second, while interest rates have been declining globally, in India, the interest rate on Adani Power’s perpetual securities has risen from 10 per cent to 11 per cent since FY20.

In effect, unlisted Adani entities may have borrowed at lower interest rates to invest in high cost perpetual securities, making a tidy sum in the process.

Analysts typically add half of outstanding perpetual securities to debt to reflect their hybrid nature. The absence of reporting regarding the identity of the perpetual securities’ investors and their source of funding supports the view that the criteria for categorising 50 per cent of Adani group’s perpetual securities as equity are met in letter, and not in spirit.

The conglomerate also owes creditors ₹4,613 crore for capital expenditure, as of March 31, 2021. The sum of reported debt plus 50 per cent of perpetual securities and creditors for capital expenditure minus the modest ₹10,439 crore cash, is equivalent to a sizeable 5.23 times of EBITDA.

Negative free cash flows

Free cash flows — cash flow from operations minus interest expense, capital expenditures and dividends - continue to be negative, implying that the conglomerate would have to either refinance maturing debt or convert them to high-cost perpetual securities. This is despite the zero dividend payout in FY2021.With capital and acquisition expenditures for listed entities more than doubling to ₹38,765 crore in FY21 and likely to remain high going forward, the conglomerate’s indebtedness is bound to increase further. Adani Group has also assumed the ₹8,000 crore debt of the recently acquired Mumbai International Airport. Investments in predominantly unlisted associates and joint ventures and third-party investments, the book value of which were ₹4,721 crore and ₹4,399 crore respectively, paid negligible dividends of ₹7 crore in FY2021. No stranger to controversy, the Adani Group does seem to be in a spot at the moment. Regulatory probes into its ownership, ambitious plans to grow its thermal power stations and weak financial performance cloud its prospects.Given the limited equity stakes held by institutional and retail investors, the onus is now on lenders to ensure that the Adani Group improves the quality of its disclosures and prioritises strengthening its finances over growth. Lenders may be best positioned to ensure that these overdue improvements in Adani group’s management are effected. After all, debt is the fuel that powers the Adani juggernaut.