Pledge, grow and borrow model of Adani sinks group shares

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By S Jha

New Delhi, October 3: A few days ago, Gautam Adani wrapped up the acquisition of Ambuja Cement and ACC cement to take market leadership position, extending the roller-coaster drive of the Gujarat-based industrialist.

A day after completing the acquisition of the two cement major companies, Adani informed the stock market that it has pledged entire shares of Ambuja Cement. That’s typical Adani business model – borrow, pledge and acquire – with the financial institutions falling over each other to give that extra leverage to Adani.

Adani Group had informed the bourses that it had pledged shares worth $13 billion of Ambuja Cement and ACC bank with the Hongkong branch of Deutsche Bank.

Credit Suisse and Deutsche Bank are now ringing the alarm bells in the global capital markets. Both the banking behemoths are stated to be under stress. Share prices of both the banks are at record low, even lower than the 2008 levels when the collapse of Lehman Brothers too the global equity and bond markets to the bottom.

Over the weekend, the social media across the world was buzzing with speculations over the fate of Credit Suisse and Deutsche Bank, with many market participants drawing parallel between the two banks and the Lehman Brothers.

On Monday, the first trading day of the equity market, the bourses sent Adani group of companies searching for the bottom, with investors punishing the excessive leverage model of the companies.

Adani Enterprises, which had seen the levels of Rs 90 a piece but zoomed to the record level of Rs 3800, sank 10 per cent to hit the lower circuit.

Ambuja Cement and ACC, two newest acquisitions of Adani, also sank heavily on the bourses, falling by over six per cent. Only a few days ago the traders were singing glory for the two cement stocks that they would gain from the capital infusion by Adani.

It is however immediately not known what would be the extent of damages if the two MNC banks face stress in the next few weeks. It is also not fully known if there would be chain reaction of cascading effect on account of the stress of the two banking majors.

Several of the Adani stocks hit the lower circuits – a situation when there are no buyers for shares while sellers dump their holdings – on Monday on the bourses. Many of such stocks had multiplied by several times in the last 18 months even while their peers hardly made any gains on the stock markets.