It is no secret that most Indian firms starting off as family-run businesses never outgrow their past. Even after they become large and go public, the controlling shareholders, their kith and kin and their private firms are usually the first port of call as suppliers, contractors, advisers and buyers, often to the detriment of minority investors.
Over the last eight years, the country has adopted — and frequently tweaked — a comprehensive set of regulations around disclosing related-party transactions. But is the spirit of the law filtering into corporate behaviour? Maybe not.
Views in the financial and legal community differ, but at least some experts I spoke to believe that India’s No. 1 infrastructure player, which has been in the eyes of a governance storm this year, should have been more forthcoming about doing business with a legal firm where Paridhi Adani, the chairman’s daughter-in-law, is a partner.
A short-seller attack earlier this year on the Adani Group had focused on a different family member. New York-based Hindenburg Research had gone after tycoon Gautam Adani’s older brother, Vinod, and questioned his relationship with the conglomerate.
The Dubai-based businessman’s “labyrinthian network” of shell entities props up the younger sibling’s Indian empire by “surreptitiously moving money,” Hindenburg had alleged. The group said in its rebuttal that all transactions with related parties had been duly identified and disclosed: “Vinod Adani does not hold any managerial position in any Adani listed entities or their subsidiaries and has no role in their day to day affairs.”
Paridhi Adani's involvement, however, may have to be viewed differently. The head of the Ahmedabad office at Cyril Amarchand Mangaldas, or CAM, a top Indian law firm, Paridhi is married to Karan Adani, the older of Chairman Gautam Adani’s two sons and the chief executive officer of the ports business.
She and her husband are the two designated partners in Adani Infracon LLP. In response to my emailed questions, a CAM spokesperson said that the advocate is “not a director nor holds any position of any nature in the business of Adani Group,” and that Infracon is “a personal entity currently holding art objects.”
But perhaps more significant than that, on her law firm’s website, she advertises her involvement in M&A activity that, I believe, is of vital importance to Adani’s financial health and its valuation. Yet, the group hasn’t made any disclosures that show her or her law firm as a related party, or describe the deals as related-party transactions.
Although the conglomerate denied all of Hindenburg’s accusations, the ensuing $150 billion loss of market wealth over just about a month led India’s Supreme Court to set up an expert committee. It was asked to investigate whether there had been any regulatory failure in dealing with “the alleged contravention of laws pertaining to the securities market.” Related-party deals is one of the areas the panel looked at.
According to the short seller, seven key listed entities of the Adani Group collectively have 578 subsidiaries and have engaged in a total of 6,025 such transactions in the financial year that ended in March 2022. Why are the numbers so high? Adani said its reply to Hindenburg that in the infrastructure business, financiers and regulators insist on housing separate projects in different companies.
Considering that the Securities and Exchange Board of India has been asked by the court to wind up its inquiry by August 14, it has little time to review all the transactions highlighted in the Hindenburg report. But there may be a simple way to obtain a flavour of India Inc.’s potential disclosure deficit: Look at someone who neither came up in Hindenburg’s January 24 report, nor in the group’s January 29 rebuttal. Paridhi Adani.
CAM’s website lists three past deals under her professional experience:
Adani Ports & Special Economic Zone Ltd.’s acquisition of 75 per cent of Krishnapatnam Ports closed in October 2020; Adani Green Energy Ltd.’s solar joint venture with TotalEnergies SE kicked off the same year. The French energy giant took a 37.4 per cent stake in the firm now known as Adani Total Gas Ltd. in February 2020.
But the annual reports of Adani Ports, Adani Green Energy and Adani Total Gas (or its predecessor, Adani Gas) have made no mention of utilising the services of a law firm where a close family member is a partner. While Gautam, Karan, Gautam’s younger brother Rajesh, his son Sagar, and Vinod’s son Pranav do feature in the section “key managerial personnel and their relatives” in disclosures, Paridhi does not.
While this omission could potentially be problematic in itself, a bigger concern is that Paridhi Adani is the daughter of CAM’s managing partner, Cyril Shroff. The firm, and Paridhi Adani, were also involved in the Adani Group’s mega acquisition last year of Holcim Ltd.’s cement business in India. To be clear, the lawyer and her firm are under no obligation to report their association to the market regulator.
The entire issue is about whether the in-laws were lax in disclosing her (and her firm’s) role in their business. The legal and accounting professionals I spoke to — by presenting them with the situation as a hypothetical — gave different answers. According to one, Paridhi Adani should have been disclosed as a related party.
A second said no, as publicly traded companies didn’t deal directly with her, but added that her firm becomes a related party under Indian rules because the daughter-in-law is a partner there. A third expert said neither party has that status until it could be proven that she exercised significant control over CAM. A fourth said it would be enough for Adani directors related to her to have recused themselves when they awarded the M&A mandates.
An Adani spokesperson said this in response to my emailed questions about the lack of disclosures:
“We firmly assert that the stated findings and conclusions are misleading and do not display accurate understanding of the Indian regulatory framework and its disclosure requirements. It is important to note that Ms. Paridhi Adani, Partner at Cyril Amarchand Mangaldas (CAM), does not qualify as a related party under all prevalent laws and regulations. CAM and all its partners offer professional services to the Adani Group in adherence to regulatory requirements and we have made all necessary disclosures in this regard. To meet our business requirements, the Adani portfolio of companies engages and maintains professional relationships with several International and Indian law firms. Your insinuations and aspersions concerning potential conflicts of interest with CAM or any other law firm or its partners are unfounded.”
My questions to the group on potential conflict of interest stemmed from the recent full-year results.
A note accompanying Adani Green Energy's May 1 financial statement said that the group had undertaken a review of the transactions mentioned in the short seller’s report and “obtained opinions from independent law firms in respect of evaluating relationships with parties having transactions” with the holding company and its subsidiaries. Everything was found to be in compliance with the law.
A day later, however, Adani Total Gas’s financial results used somewhat different language. In notes to the accounts, the company said that the Adani Group had undertaken a review of the transactions cited by Hindenburg through an independent assessment by a law firm. “The report confirms company’s compliance of applicable laws and regulations.”
Does it mean that Adani Total Gas got its legal assessment from a firm that was not independent? Could that have come from CAM? I asked the Adani Group. Their reply, reproduced above, did not directly address this question. Once again, there is no hint that CAM, even if it did give an opinion, acted inappropriately.
The auditor’s commentary on Adani Total Gas’s results reiterated the management’s position, but added that pending the completion of court proceedings and investigations by regulators, “we are unable to comment on the possible consequential effects thereof, if any, on this statement.”
With that, Shah Dhandharia & Co., which had only last year got a second five-year mandate to audit the firm, resigned its commission “due to increased professional preoccupation” and not because of “an inability to obtain sufficient appropriate audit evidence,” it said.
The auditors didn’t respond to my emailed questions about which law firm’s assessment was used. The Adani Group has previously told The Morning Context, a news website, that it is not mandatory to disclose the details of the lawyer’s report. However, investors, creditors and partners are waiting for a resolution of the Hindenburg allegations. France’s Total put its multi-billion-dollar plan to produce green hydrogen with Adani on hold after the short seller’s report.
The related-party question flared up again when Deloitte Haskins & Sells LLP raised concerns about Adani Ports’ May 30 results. The auditor said it couldn’t confirm that three entities, with which the port unit had transactions, were indeed unrelated as claimed by the company.
Further, it said that the legal evaluation sought by the group on the veracity of Hindenburg’s allegations was insufficient for the audit. It signed off on the books with what’s called a “qualified opinion,” Bloomberg News has reported.
In its listing obligations and disclosure regulations of 2015, the stock-market watchdog ordered publicly traded firms to report transfer of resources with directors or key management personnel, or their relatives, regardless of whether money had changed hands. Last year, the SEBI tightened the rules — both for transactions that only had to be disclosed and ones that required shareholder approval.
All this suggests an improving arc of governance. But if experts can’t agree on whether simple dealings with Paridhi Adani's law firm should be disclosed and how, then how will the SEBI ever get to the bottom of the short seller’s insinuations about Vinod Adani’s alleged (and allegedly more complex) involvement?
Something is clearly amiss with the regulations. The fix does not lie in burying the spirit of the law further into a bottomless pit of rules. The regulator needs to start afresh by clearly laying out the principle it wants to uphold. After that, the fairness of commercial transactions is for the market to decide. The failure to disclose them is what the SEBI needs to go after in its enforcement action.
Common sense suggests that a law firm with whose partners Adani directors have family ties presents a potential for conflict. The legal fees paid to CAM are not important to a group of Adani’s size. But India Inc.’s culture of disclosure — or its absence — ought to be.
(This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.)
(Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.)