Indian billionaire Gautam Adani’s rapid downfall has sparked renewed scrutiny on the tycoon’s close ties with Indian Prime Minister Narendra Modi.

Adani lost his crown as Asia’s wealthiest man in a matter of days, as his fortunes unraveled after a report from U.S. short-seller firm Hindenburg Research in late January alleging fraud.

The fallout has reverberated across global markets, and last week, MSCI cut its weighting of four Adani stocks on the MSCI Emerging Markets Index.

India’s top industrialist has also drawn the attention of the country’s watchdog, the Securities and Exchange Board on India. The markets regulator is now launching an investigation into the allegations made by Hindenburg against the Adani business empire.

The debacle laid bare the longstanding relationship between India’s super-rich corporate titans and the political elite.

Hindenburg’s report has further sharpened the focus on the billionaire mogul’s close ties with Modi.

“Adani has pulled off this gargantuan feat with the help of enablers in government and a cottage industry of international companies that facilitate these activities. These issues of corruption permeate multiple layers of government,” the report alleged.

In a rebuttal that ran over 400 pages, the Adani Group rejected those allegations, calling them a “calculated attack on India.” 

The company did not respond to CNBC’s request for comment. The prime minister’s office did not respond to a request for comment.

‘Crony capitalism’

India has always struggled with “crony capitalism,” but the cozy relationship between Modi and Adani has “taken it to a different level,” according to Ashok Swain, head of the department of peace and conflict research at Uppsala University in Sweden.

“Modi and Adani probably share the closest relationship a politician can have with a businessperson; certainly, it had never happened in India. Their rise has been together,” added Swain, a veteran observer of Indian politics.

Adani’s family-owned conglomerate spans from airports and maritime ports to coal and renewable energy and more recently, media.

India’s “chosen growth model” requires a “certain degree of crony capitalism,” said Milan Vaishnav, South Asia director at the Carnegie Endowment for International Peace.

Vaishnav added the Modi government’s industrial policy is premised on building up national champions in industry, and Adani has been the “poster child to date.”

“There’s no question that Adani enjoys this position today at least in part because of his proximity to the prime minister,” he said, “but also because of a perception that he is able to execute on projects at scale.”

A ‘fruitful relationship’

The relationship between Adani and Modi is longstanding.

Both men hail from India’s western state of Gujarat, where Modi was the chief minister in 2001. Adani was an early supporter of Modi’s political aspirations and championed the Indian leader’s growth vision for India.

Modi flew in an Adani jet after he was elected to national office in 2014. 

“That Adani and Modi forged a close bond during their years in Gujarat is an open secret,” noted Vaishnav.

“There is no question that the fortunes of these two men are connected,” he said, “especially in the past few years as the government has ramped up capital expenditure as it makes a concerted push on infrastructure.”

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The Adani Group is a key player in Modi’s ambition to transform India into a $5 trillion economy, said Alim Remtulla of Medley Advisors.

Both men embody the “Gujarat growth model,” he said, referring to the embrace of close relations between big business and government.

“Specifically, infrastructure is a key element to Modi’s nation-building plans. Adani [Group] is one of the few firms in the country that can deliver on these major infrastructure projects across the country,” Remtulla told CNBC’s “Squawk Box Asia.”

“Similarly, for Adani, he needs the implicit backing of Modi to raise funds for these capital-intensive projects. So this is a long and fruitful relationship that goes back decades,” he said.

Opposition attacks

Hindenburg’s report turned out to be a political gift for India’s opposition, which for years has railed against Modi for his links with Adani. With national elections looming next year, opposition critics have seized on the report to attack Modi and his party.

India’s main opposition Congress party has staged protests and demanded a probe over Hindenburg’s allegations. Opposition critics have also accused Modi’s government of giving unfair favors to Adani’s business empire.

“The entire country has observed a close connection between the Adani Group’s commercial interests and your [Modi’s] eagerness to help him using government policy. This pattern is consistent across sectors ranging from agriculture to energy to transportation,” Jairam Ramesh, the Congress party’s general secretary, said in a statement last week.

In 2018, the Modi government reportedly changed rules that allowed Adani to bid — and eventually win — tenders for six airports. It was met with outrage amid criticism of cronyism. The government has rejected those allegations.

After Modi became prime minister, Adani continued to benefit from the relationship but on a much larger scale, said Swain.

“Besides giving licenses for the airports and ports, changing the environmental rules for Adani’s coal mines, and tweaking the rules to favor Adani’s stakes in special economic zones, Modi has helped Adani’s businesses in many ways,” he said.

In his address to Parliament last week, the prime minister seemed unfazed by the opposition’s criticism and made no mention of Adani.

“The blessings of 1.4 billion countrymen are my biggest ‘suraksha kavach,’” Modi said, using a Hindi term meaning “safety shield.”

“And you can never breach this safety shield with the weapons of abuse and lies,” he said, as opposition lawmakers chanted “Adani, Adani.”

Adani has rejected claims that he gained personal favors from Modi, calling such allegations baseless.

“Prime Minister Modi and I are from the same state. That makes me an easy target for such baseless allegation,” said the tycoon, according to a January report in India Today.

“My professional success is not because of any individual leader but because of the policy and institutional reforms initiated by several leaders and governments over a long period of more than three decades,” he said in the report.

Political damage?

Politically, it’s hard to predict what effect, if any, the fresh scrutiny will have on Modi’s popularity and his ruling Bharatiya Janata Party, observers said.

“I am skeptical that the Adani crisis will personally tarnish Modi or hamper the electoral prospects of the BJP,” said Carnegie’s Vaishnav.

Still, the relationship between Modi and Adani is “so long and strong” it will be tough for the prime minister and his party to wriggle out of this crisis unscathed, added Swain.

“Adani’s close link with Modi has forced his supporters and India’s Hindu nationalists to defend [Adani] for the last nine years. It will not be that easy to distance themselves from Adani now,” he said.