U.S. probe to have ‘limited impact’ on Adani Group, says JPMorgan; maintains 'Overweight' call on Adani Ports

U.S. brokerage JPMorgan has said that the U.S. investigators' probe against Gautam Adani-led Adani Group over allegations of bribery is likely to have “limited” potential financial and fundamental impact. The rating agency has decided to not make any changes to its recommendations at this stage for the Adani Group, citing that “details are very scant and the investigation itself might not lead to any successful prosecution”.

On March 15, Bloomberg reported that prosecutors from the U.S. Attorney Office and Justice Department (DoJ) are probing an Adani Group entity and Indian renewable energy company Azure Power Global Ltd on potential bribery investigations. The U.S. investigators were looking into whether an Adani group entity or its affiliates, or people linked to the company including Gautam Adani, were involved in bribing officials in India for preferential treatment on energy projects.

“Overall, assuming this is related to the renewable energy project of the companies, we believe such provisions are highly unlikely to lead to a material financial impact even if the reported investigation moves to the prosecution stage and thereupon establishment of an instance of bribery,” JPMorgan says in a report released on March 18.

“Given the high level of transparency involved in various renewable energy tenders floated in India, the scope for significant corruption and bribery looks highly unlikely to us,” it adds.

Which entity could be the target?

JPMorgan in its report says, “The news article highlights an Adani Group entity that was potentially involved in paying officials in India for favourable treatment on an energy project.” “Based on the profile of U.S. dollar denominated bond issuers from the group, this could be related to Adani Green Energy. The association with Azure Power in the same article also reportedly points to this,” it highlights.

Notably, there is one 12 GW manufacturing-linked solar energy project that was signed by both Adani Green (8 GW allocation) and Azure Power (4 GW) with SECI (Solar Energy Corporation of India) in January 2020. This project remains under construction and does not form part of any of the restricted group (RG) bonds from these two entities.

Meanwhile, the port-to-power conglomerate has clarified that it has not received any notice from the Department of Justice of the U.S. in relation to the bribery allegations.  "This is in relation to the article titled ‘U.S. Probing Indian Billionaire Gautam Adani and His Group Over Potential Bribery’...Adani Enterprises Limited (“Company”) states that it has not received any notice from the Department of Justice of U.S. in respect of the allegation referred to in the said article," Adani Enterprises said in an exchange filing on Monday.

What could be the fundamental impact?

JPMorgan in a report says, “Assuming the news to be true, we believe that the legal basis for such investigations comes from the U.S. Foreign Corrupt Practices Act (FCPA). The FCPA, apart from provisions related to accounting fraud/ internal controls, prohibits U.S. and foreign (if under purview) individuals and corporates from making corrupt payments to foreign officials to obtain or retain business.”

“Based on our understanding, corporates that are listed in the U.S. or have issued securities to U.S. investors could fall under its purview too. Both the U.S DoJ and the SEC share enforcement authority under the FCPA,” it says in a report released on March 18.

The U.S.-based rating agency believes that in terms of provisions of the FCPA, anti-bribery provisions can lead to a fine of $2 million or twice the monetary gain, whereas for individuals it could be up to 5 years imprisonment and a U.S. $250,000 fine or twice the monetary gain.

Maintains Overweight on Adani Ports; downgrades Azure Power to neutral

JPMorgan has maintained an ‘Overweight’ call on Adani Ports and SEZ bonds. “Within the Adani Group, we continue to favour Adani Ports, where we are OW (Overweight) across the curve. We highlight that as late as November 2023, Adani Ports had received about $553 million as a loan for its Colombo Port project from the U.S. government’s development financial arm, DFC.”

The rating agency says that this may not imply a “clean chit”, it does indicate some level of diligence being undertaken at the Adani Ports level ahead of making the investment.

“We have been UW (Underweight) on Adani Green RG1 ADGREG 2042s and Neutral on RG2 ARENRJ 2039s. We are Neutral on ADANEM USD bonds and OW on ADTIN 2026s and 20236s. We reiterate our recommendations,” the report notes.

Meanwhile, the agency has recommended a ‘Neutral’ rating to Azure Power’s bonds, citing tight valuations. “While we remain comfortable on fundamentals with respect to the two RG bonds, we recommend Neutral on account of tight valuations for the two bonds – AZUPOE 2024s and AZUPOE 2026s,” it adds.

Recently, Azure Power announced a leadership change with its chairman M.S. Unnikrishnan resigning from the board of the company, who was appointed only in October 2023. Before this, he was a board member of the company since August 2020. “While we do take this new leadership change as negative, we remain comfortable on the fundamentals, where the recent bond buyback highlights continued good operating cash flows at the two RG bonds,” the report highlights. 

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