In today’s Finshots, we tell you why GQG, an investment management company, may be stuck in a dilemma over its support for the Adani Group.

The Story

The Adani Group has been weathering massive storms for the past two years.

Remember when, in January 2023, the US-based firm Hindenburg Research unleashed an elaborate research report on the Adani Group? It accused the business giant of engaging in extensive accounting fraud, stock price manipulation, and even exploiting tax havens. This not only tarnished the group’s reputation but also triggered a meltdown of over ₹12 lakh crores in the shares of Adani’s publicly listed companies.

And last week, the US market regulator, the SEC (Securities and Exchange Commission) and its Department of Justice dropped another bombshell. They accused Gautam Adani and seven others of allegedly bribing Indian officials with ₹2,000 crores to secure solar energy contracts for Adani Group subsidiary Adani Green.¹

Now, if you’re wondering what US authorities have to do with an Indian bribery case, here’s the deal. While the contracts in question were local, the financing wasn’t. After allegedly securing solar energy contracts by paying bribes, the Adani Group needed funds to fulfil these projects. So, they turned to US investors for financing. But they didn’t disclose that these contracts were allegedly won through bribes because who would, right?

And here’s where the US steps in. American regulators are fiercely protective of their investors. Plus, the Foreign Corrupt Practices Act (FCPA) is crystal clear. US companies and their subsidiaries can’t bribe foreign officials to win business. Since US investor money went into projects secured by greasing palms in India, the FCPA allows the US to initiate legal proceedings for bribery cases tied to its financial system. That makes it clear why this case has landed on American soil.

And the aftereffects have been nothing short of humongous. Adani Group stocks lost nearly ₹2.45 lakh crores in market value within just three days after the news got out.²

But wait, Finshots. Isn’t this old news? Why are we talking about it now?

Well, as news of the indictment spread, reports emerged that credit rating giants Moody’s and Fitch had downgraded Adani’s credit ratings.³ So, we want to shift the lens a bit and focus on what Adani’s institutional investors are up to.

You see, conglomerates like the Adani Group, which operate in sectors ranging from airports to ports to renewable energy, depend heavily on global institutional investors. These investors don’t just bring in funds; they lend credibility and trust to the markets, retail investors and even governments.

But trust is fragile. When controversies erupt, that trust is the first to waver. Stock prices nosedive and investors face a tough choice ― stay put or pull out.

Now, this new accusation has made things tough for the Adani Group. Both its borrowings and shares are feeling the heat. The value of its dollar-denominated bonds (money it borrowed by issuing bonds in US Dollars) has dropped sharply, reaching levels not seen in almost a year. Some banks are even holding off on fresh lending to the group. Global partners like French energy giant TotalEnergies have also hit the pause button, waiting for more clarity before committing to new investments.⁴

And it’s not just the private sector. Governments are reacting, too. Kenya recently cancelled Adani deals worth over $2.5 billion.⁵ A US agency is reconsidering its support for an Adani-linked port project in Sri Lanka. And in Bangladesh, a government panel is scrutinising Adani power deals for any irregularities.

However, amidst all this chaos, one institutional investor remains steadfast — GQG Capital.

GQG is a US-based investment management company and it isn’t flinching. It’s confident in Adani’s core operations — ports, power and infrastructure, and their importance to India’s long-term growth story. And its reasoning is pretty straightforward. The US authorities’ allegations might not have a big impact on Adani’s actual business. At worst, if the group is found guilty, it might have to pay hefty penalties. But GQG believes Adani can handle that.

Sure, this could make it harder for Adani to raise funds from international investors. But here’s the thing. Most of Adani’s revenues come from long-term contracts. So, it might not even need fresh capital anytime soon. And that’s why GQG has decided to stick with its investment. GQG’s $8 billion investment in Adani companies — about 5% of its total assets, shows just how confident it is.⁶

But that’s also where things get tricky. GQG’s strong backing of Adani isn’t sitting well with everyone, especially its own clients, who are starting to question the firm’s investment strategy. The thing is, GQG has so much money tied up in the Adani Group that walking away now could mean big losses. So, clients are wondering if their loyalty to Adani is more out of necessity than confidence.

The market hasn’t been kind either. GQG’s shares, listed in Australia, tanked over 20% following the US indictment.

And there’s more to this. Analysts warn that GQG’s deep involvement in Adani Group companies poses a systemic risk. For context, GQG’s holdings alone make up 12–20% of Adani’s free float — the shares available for trading. Combine that with LICs stakes, and you’re looking at nearly a third of the total.⁷

Just think about it. If GQG is pressured to sell even a fraction of its stake, it could set off a domino effect in the market, spooking other investors to follow suit. And that’s the precarious situation GQG, LIC, and other big investors are in — a classic Mexican standoff. Or a situation where multiple parties are locked in a confrontation, and no one can move without putting themselves at risk. No one wants to make the first move, knowing it could destabilise the market and hurt their own interests, causing them immeasurable losses.

So the big question is, will GQG stand its ground as it did last year?

You see, back in 2023, when the Hindenburg report sent Adani stocks into a tailspin, it was GQG that stepped in with a $1.9 billion lifeline. That vote of confidence helped stabilise the situation, with Adani stocks eventually recovering and surpassing pre-Hindenburg levels.

Or will mounting client pressure force GQG to retreat this time, potentially triggering a full-blown crisis?

Only time will tell.

Until then…

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Story Sources: India Today [1]; Business Today [2]; Business Standard [3] [5]; Times of India [4]; Livemint [6]; The Hindu Businessline [7]

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