(Bloomberg) -- The crisis of confidence plaguing Gautam Adani has taken a sudden turn for the worse, with a record 28% plunge in his flagship company’s stock raising questions over the extra collateral he needs to cover loans.

Adani Enterprises Ltd. plummeted in afternoon trading in Mumbai after Bloomberg reported Credit Suisse Group AG has stopped accepting bonds of Adani Group’s firms as collateral for margin loans to its private banking clients. Banks including Barclays Plc had earlier asked for more shares to cover a $1 billion loan.

With the rout in the group’s stocks triggered by short seller Hindenburg Research’s fraud allegations reaching $92 billion on Wednesday, the risk is that more financial institutions start to scrutinize their exposure to the indebted conglomerate. Without a dramatic upturn, investors who bought into a recently completed $2.5 billion stock sale by Adani Enterprises may be staring at deep losses.

“The problem now is that the dynamics are becoming a self-reinforcing negative feedback loop and investors are now just dumping the shares and asking questions later,” said Peter Garnry, head of equity strategy at Saxo Bank A/S.

Adani Group Bonds Slide as Margin Loan News Sours Sentiment

Credit Suisse’s private banking arm has assigned a zero lending value for notes sold by Adani Ports and Special Economic Zone Ltd., Adani Green Energy and Adani Electricity Mumbai Ltd., according to people familiar with the matter. It had previously offered a lending value of about 75% for the Adani Ports notes, one of the people said.

When a private bank cuts lending value to zero, clients typically have to top up with cash or another form of collateral and if they fail to do so, their securities can be liquidated.

Loan Collateral

On Friday, Adani added about $300 million worth of shares for the $1 billion loan made by a group of banks, according to people familiar with the matter.

“The Adani family might need to pledge more shares given the drop in share prices, though they could still maintain a healthy headroom with the portion pledged at no more than 40%, based on our calculation,” Sharon Chen, credit analyst at Bloomberg Intelligence, wrote in a note.

Adani Debts Enter Spotlight as Dollar Bond Deadlines Loom

Adani Power and Adani Ports had the highest portion of shares pledged as of December, according to Bloomberg Intelligence. Adani Power slid 5% on Wednesday. The port unit sank 19%, the most on record. 

The equity selloff comes after Adani Enterprises pulled off a successful share sale, which was India’s largest follow-on offering. At least two of India’s biggest business families, including Sajjan Jindal and Sunil Mittal, participated, according to people familiar with the matter, in a sign of solidarity with the billionaire. 

Adani Enterprises shares sank to as low as 1,941.20 rupees on Wednesday, 38% below the lower end of the offer price range of 3,112 to 3,276 rupees. The firm is expected to announce the final price for its offering later today.

“The important thing to watch now post allotment is what level of holding period the investors are willing to have on these shares,” said Sameer Kalra, founder of Target Investing in Mumbai. “Having a few investors getting most of the allotment, there is a risk of some portion being sold immediately.”

Adani Stock Sale Scrapes Through With Less Demand Than Peers

Personal Wealth

Adani has now lost the title as Asia’s richest person to rival billionaire Mukesh Ambani, according to the Bloomberg Billionaires Index. In just one week, his eye-popping wealth gains from last year, some $44 billion, have evaporated. 

The storm engulfing Adani has become a test case for India as well, with Hindenburg’s allegations raising questions over the country’s corporate governance, while Adani himself has called the report an attack on India itself. 

Market watchers see the fight between Adani and Hindenburg continuing, after the two traded barbs earlier in the week. The Indian conglomerate has called Hindenburg’s report “bogus,” threatened legal action and said it was “a calculated securities fraud” in its 413-page rebuttal, which the short seller said ignored all its key allegations and was “obfuscated by nationalism.”

“Cash generation at Adani companies remains poor while they have traded at extremely high multiples. So, their servicing capability of debt can be impaired if things do not go as per the plan,” said Amit Kumar Gupta, CIO of New Delhi-based Fintrekk Capital. “Now the issue is if stock prices don’t go up, this leverage is detrimental to the group.”

--With assistance from Thyagaraju Adinarayan, Anders Melin, Abhinav Ramnarayan, Ashutosh Joshi and Catherine Bosley.

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