ARI SHAPIRO, HOST:
The Adani Group is one of India's largest conglomerates, and it recently lost tens of billions of dollars in market value. An American investing group called Hindenburg Research accused the company of fraud in a report last month. Paddy Hirsch and Darian Woods from our daily economics podcast The Indicator explain what happened and what the fallout could be for India's economy.
PADDY HIRSCH, BYLINE: Hindenburg Research has this reputation for sniffing out overlooked or ignored problems in publicly traded companies. And it makes money by publicizing those problems and then short selling the company's shares.
DARIAN WOODS, BYLINE: Most of us - when we invest in a company, we bet on the company. We buy the company's shares in the expectation that the value of the shares will rise. And that's so that we can sell them later at a profit.
HIRSCH: Short sellers, on the other hand, bet against companies. They don't buy shares. Instead, they borrow them, and then they sell them, expecting the value to fall. When it does, they buy the shares back at the lower price, return them to the person they borrowed them from, and they pocket the difference.
WOODS: And that's exactly what Hindenburg did with the Adani Group shares. And it was absolutely transparent about it. In its report, it said Adani was a massive con, and by the way, we intend to profit from telling you this. The Adani Group has denied pretty much everything in their report, but the damage was done. After it came out, shares of the group's flagship company fell 55%. So clearly Adani is in trouble. But what about India?
HIRSCH: The country competes fiercely with other emerging nations like Vietnam for foreign investment dollars, which means that it's under constant pressure to show that it's a safe place to invest. Surupa Gupta is a professor of political science and international affairs at the University of Mary Washington.
SURUPA GUPTA: This is the last thing India needed. If you are looking for foreign investment, then you also want to signal that the policy framework in the country is strong.
WOODS: The Adani meltdown has done just the opposite. Now, allegations about dodgy business practices have swirled around the Adani Group for years.
HIRSCH: But the report has collated and packaged these allegations, along with a few more, in a way that's thrown a fresh spotlight on several areas that always concern foreign investors - sweetheart dealing, opaque accounting practices, cronyism and, perhaps most importantly, problems with transparency.
WOODS: But while Surupa acknowledges that Indian companies may be less transparent than U.S. or European equivalents, she says that the Indian government has been working to change things.
HIRSCH: Yeah, banks have been consolidated. Regulators have been created and empowered. As for the concerns raised by the Hindenburg report about accounting practices and corporate governance...
GUPTA: I don't think this reflects on how all Indian companies are run because I think there are a number of companies that are run fairly well and that have done well internationally. And they have good management. And I don't know that I would say that this is an indication of an endemic problem in Indian corporate sector as a whole.
HIRSCH: It's still not clear how the Adani Group's problems might ripple through the Indian economy. The companies it owns are already deep in debt, and it will now be difficult for them to borrow the money that they need to grow more. But there are many other conglomerates in India, like the Tata Group or Reliance Industries, that are generally trusted by foreign investors and could step in.
WOODS: As for the financial system, the Reserve Bank of India announced that none of the nation's banks are overexposed to Adani. So the damage should be limited. Surupa says that with a bit of luck, this whole affair could actually benefit India by spurring further financial sector reforms.
HIRSCH: Paddy Hirsch.
WOODS: Darian Woods, NPR News. Transcript provided by NPR, Copyright NPR.
