Adani allegations underline the need for strong governance in India

America’s Department of Justice and the Securities and Exchange Commission have indicted Gautam Adani, his nephew Sagar Adani, and six others, alleging their involvement in paying $250 million in bribes to Indian officials and concealing the scheme from US investors. The allegations have been denied, citing a lack of evidence that the bribes were paid.

 

This comes within two years of allegations by Hindenburg, a New York-based short-seller. In January 2023, Hindenburg accused the Adani Group of stock manipulation and accounting fraud, claiming the group inflated its market value by using offshore funds. The Securities and Exchange Board of India (Sebi) investigated the group’s transactions but has not found or reported any evidence of wrongdoing. However, Sebi turned the tables on Hindenburg, telling them that the short-seller itself was being investigated for trading on non-public information from its own report. 

 

In March 2023, the Supreme Court set up a committee under Justice A M Sapre to investigate potential regulatory failures after investors incurred significant losses due to market volatility following these allegations. While the committee did not give a clean chit to Adani on many aspects of the probe, it stated that there is no evidence “as of now” against the conglomerate. Additionally, the committee found no regulatory failure on Sebi’s part in its investigation into the Adani companies.

 

If anything, Hindenburg’s allegations were more serious, though the current allegations come from a more credible source and may have some consequences. But regardless of the facts — and the eventual outcome — the allegations strike at the heart of doing business in India.

 

Over the past several years, India has steadily gained from the global “China plus one” push. Under this strategy, companies, while continuing to source or manufacture in China, look to other economies — including India— as an additional (or secondary) location to diversify their supply chains.

 

This China plus one strategy gained currency during the Covid-19 pandemic, as it exposed the vulnerability of relying too heavily on a single country for manufacturing and logistics.

 

This practice has been given a leg-up as companies looked for ways to manage potential challenges in their supply chains, driven by geopolitical risks, particularly tensions between China and the US, as well as the US-China trade war and tariffs on Chinese goods. Rising labour costs in China have also prompted businesses to look for more cost-effective alternatives.

 

Even as India presents a compelling investment opportunity, the narrative has remained that India, despite its recent progress, cannot replace China — at least not in the short term. China offers infrastructure on an unparalleled scale, its technological prowess is the envy of the world, and it boasts an integrated supplier ecosystem. It has mastered manufacturing technology and excellence, providing a streamlined business environment—all of which have enabled China to become the factory of the world.

 

International companies may not expect to find the same enviable infrastructure in India as in China. Nor do they see the same operating efficiency that China’s well-trained labour force offers. Consequently, at its core, the “China plus one” is risk mitigation. For countries looking to benefit from the shift away from China, offering other assurances is crucial.

 

India promises a younger working population and a growing middle class, which will drive consumption over the coming decades, but still needs to improve its hard infrastructure, despite the recent investments and improvements. While democracy, transparency, and the rule of law are significant assets that India boasts, businesses require much more to thrive.

 

A productive workforce requires a well-trained labour force, which means that teachers should have been present in classrooms decades ago. Basic services like healthcare, sanitation, clean drinking water, and adequate living conditions are essential areas where improvement is needed. Additionally, there are “soft” issues that demand attention, such as maintaining a strong judiciary, independent institutions, stable policies, and a consistent tax regime.

 

In its quest to build hard infrastructure within India, and to establish geopolitical strategic depth, the government has chosen to leverage private sector capital, knowing well the limits of its own ability to spend. As a result, large private sector groups are seen to be working in alignment with India’s strategic interests — defence, renewable power, semiconductors, among others. A capital-hungry India Inc will need to raise funds in global capital markets and, as a result, will be subject to global scrutiny.

 

Given this, global governments, boardrooms and investors will now be watching how India deals with these developments. Indian regulators are largely seen as amongst the best in class globally, and nothing should be allowed to change this reality. A swift response from the Indian regulatory system will be crucial to prevent delays in India’s strategic progress. It is up to the sceptics and cynics to accept the findings.

 

Only by maintaining credibility in the rule of law, and trust in the system can the vision of “Make in India” and of a Viksit Bharat be realised. 

 

The author is with Institutional Investor Advisory

 

Services India Ltd. The views are personal. X: @AmitTandon_In