Allegations that billionaire Gautam Adani has benefited from his proximity to Prime Minister Narendra Modi — strenuously denied by the group — are being raised relentlessly by the Congress Party’s Rahul Gandhi and other opposition leaders in a bid to shake Modi’s seemingly ironclad grip on power in the lead up to next year’s national elections.
All that’s happening largely in New Delhi, India’s political capital. The big question in India’s financial capital of Mumbai, however, is more forward-looking. How will the country fill the gaping holes in its infrastructure if the sector — already plagued by chronic low profitability — loses access to much-needed global financing in the aftermath of the Adani scandal?
It’s been nearly two months since New York-based Hindenburg Research accused the Indian businessman of “brazen stock manipulation and accounting fraud.” Although the group responded with a 413-page rebuttal, and Florida-based emerging-market investor GQG Partners Inc. bought almost $2 billion of its stock, the market value of Adani firms is still more than $100 billion lower than before the short-seller’s report. The Indian Supreme Court has set up a six-member committee to probe the allegations.
Adani is a gigantic asset owner, in control of a number of ports, airports, coal mines, power stations, transmission lines, city-gas networks, solar farms, roads, and data centers. He stepped into a breach. Domestic institutions, such as the Life Insurance Corporation of India, are simply not wired to own stuff that produces steady cash flows. So scared has LIC been of the country’s Rent Control Act of 1948 that it hasn’t liked to buy tenanted buildings in the past — only vacant ones.
Toll roads, which earn a steady revenue stream for up to 30 years, would also be a suitable asset class for a life insurer with long-term liabilities. Except that Indian insurance firms don’t have the mandate to invest directly in specially created private-limited firms in which concessionaires typically house their highways. No such rules apply to the likes of New York Life Insurance Co., which recently picked up a 49% stake in such a firm developing a commercial property on the outskirts of New Delhi.
If patient, long-term money plays a more active role in the nation’s economy, entrepreneurs like Adani would have no option except to concentrate on building new ports and airports rather than bloating their balance sheets with pre-existing ones. Sheer competitive logic will ensure that financial institutions with low cost of capital and long-term charters emerge as asset-owners.Diffused ownership would also help depoliticize the sector. The state-controlled LIC finds itself in the hot seat for its $4 billion equity and debt exposure to Adani when other local institutions like mutual funds were largely sitting out the five-year, 2,500% rally in the group’s flagship firm. There would be far fewer questions about its conduct if, instead of backing a controversial tycoon, the insurer got behind actual cash-generating assets — both at the project level and when they’re bunched together into investment trusts, as rent-earning bouquets.
Project execution requires entrepreneurial hustle. Asset ownership needs balance-sheet strength. Separating the two will depend crucially on political will. The historically incestuous relationship between India’s big business and government, made worse by the opaque electoral bonds introduced in 2018 by Modi’s party, will have to change radically. If politicians do pull off a clean break (even though it’s against their own interest), the next step may be to prepare the groundwork for an alternative-asset industry.
Prominent Mumbai financiers like Srini Sriniwasan and Rashesh Shah are doing just that. Sriniwasan, a former investment banker with Goldman Sachs Group Inc.’s now-terminated joint venture with Kotak Mahindra Bank, helped set up Kotak Investment Advisors, an alternative-asset firm with $8.8 billion in assets under management across real-estate funds, private equity, private credit, infrastructure and data centers. Shah’s Edelweiss Financial Services Ltd. has deployed $1 billion-plus of equity across alternative and distressed assets, insurance, nonbank lending and mortgages, mutual funds and wealth management. Having sold a majority stake in its wealth unit to Hong Kong’s PAG in 2020, Edelweiss is now a lean investment company with just 48 employees.
For both Sriniwasan and Shah, the goal is to assemble large, patient pools of capital in which investors will share the risk. This is a far better model for funding long-duration assets than using bank deposits maturing in a couple of years — or, for that matter, deploying mutual-fund money that can get pulled at a minute’s notice. In recent years, India has seen disastrous consequences of both.
In the absence of the right kind of homegrown capital, foreign money is calling the shots. The Canadian public pension fund, known as PSP Investments, as well as Canada Pension Plan Investment Board, or CPPIB, and Caisse de dépôt et placement du Québec, or CDPQ, have aggressively plucked high-yielding opportunities. Canadian pensioners are relying on India for a better retirement.
Meanwhile, workers in the world’s fifth-largest economy may have to put up with bad infrastructure for another generation because the institutions to which they’re making provident-fund and insurance-premium contributions aren’t ready to be asset-owners. “Once all the risk of building an asset is in the rear-view mirror and cash generation starts, we happily enable retirees in the West to collect annuity incomes on the tolls we pay,” Sriniwasan told me recently in Mumbai.
When it comes to infrastructure, India’s 1.4 billion people have only ever known two alternatives: Either the resource-starved government will under-supply, or the private entrepreneur will overcharge. The notion that financial institutions can utilize an individual’s own future wealth to give her a better life at an affordable cost is yet to take hold. And that’s the main reason why infrastructure in the country is such a cesspool of intrigue.
