The crash in the share price of an Indian renewable-power company has shaved hundreds of millions of dollars from the portfolios of two major Canadian pension funds.
Caisse de dépôt et placement du Québec and the Ontario Municipal Employees Retirement System (OMERS) own 75 per cent of New Delhi-based Azure Power Global Ltd. AZRE-N. The company lost two-thirds of its value in its New York Stock Exchange-listed shares last week, with most of the decline coming on Aug. 29.
On that day, the company announced the resignation of its chief executive officer, Harsh Shah, after less than two months on the job. It also disclosed the existence of a whistleblower complaint from May, 2022, alleging “potential procedural irregularities and misconduct by certain employees at a plant belonging to one of its subsidiaries.”
Azure said that in reviewing the whistleblower complaint “it discovered deviations from safety and quality norms” and “evidence of manipulation of project data and information by certain employees.” The company said it’s implementing remedial measures and is telling “the appropriate authorities” what it has found.
The company had said on Aug. 1 that it would be late in filing its annual report, saying it had not completed the assessment of its internal controls over financial reporting. (Companies that cannot assess their internal controls cannot certify that their financial statements are accurate.)
In an investor call Wednesday, board chairman Alan Rosling said he couldn’t comment on the size of the financial impact of the project data issue, or even rule out that Azure would have to restate its financials. Asked by an analyst if the CEO’s departure is linked to the whistleblower report, Mr. Rosling said Mr. Shah “came to me with a very personal request to be released,” but Mr. Rosling said he couldn’t say more “for reasons of confidentiality and contract.”
Trading records suggest that the Caisse spent roughly US$488-million buying more than 34 million Azure Power shares over the past six years at an average price of around US$14; the stock closed Friday at US$3.55, or US$121.6-million for the Caisse stake, an unrealized loss of more than US$350-million.
OMERS spent an average of just over US$21 per share since August, 2021, buying nearly 14 million Azure Power shares for a total of US$289.2-million. The shares are worth US$48.8-million as of Friday, a loss of more than US$200-million in just over a year.
Canada’s pension funds are investing giants – their portfolios are measured in the hundreds of billions of dollars – and they have dozens of large investments. Many are home runs, rather than strikeouts, as the funds have reported benchmark-beating returns over many years.
As well, the Caisse and OMERS will only lock in the losses if they sell their shares – if they hold and Azure Power rebounds, the two can ride the stock back up and minimize the pain. “We remain confident of our growing business,” Rupesh Agarwal, Azure’s acting CEO, said Wednesday.
But the timing and optics of the controversy are poor for both the Caisse and OMERS.
When the Caisse reported half-year results in August that featured a loss of $33.6-billion, it spent an outsized amount of time addressing a US$150-million wipeout in Celsius Network Ltd., a major cryptocurrency investment that filed for bankruptcy protection in July.
“Due diligence can be the best there is, but it’s not always a guarantee of success,” Charles Emond, chief executive officer of the Caisse, said in addressing a myriad of questions from media. “Otherwise all investments would work out well.”
OMERS, meanwhile, has reported industry-leading returns in the past 18 months, reversing a narrative from 2020, when it was the only major Canadian pension fund to lose money. However, OMERS lost its entire investment in Vue International Bidco PLC, Europe’s largest movie theatre chain, in July when a debt restructuring wiped out its equity. OMERS co-owned the chain with Alberta Investment Management Co. (AIMCo).
In an e-mail, Caisse spokesperson Kate Monfette said the fund manager has “a strong long-term conviction in the renewable-energy sector, which plays an essential role in addressing climate change. As a shareholder, we expect our portfolio companies to uphold the highest governance and compliance standards and to address quickly and effectively any issues that may arise on such matters.”
In an e-mail, OMERS spokesperson Neil Hrab said the pension manager “is an investor in high-quality investments around the globe. We invest in companies that share our values – which include acting with integrity and upholding the highest professional standards. Consistent with this, we expect the companies in our portfolio to adhere to strong and effective governance and compliance practices, and we fully support any necessary and appropriate measures on related issues.”
Certainly, Azure Power seemed to be an ideal investment for multiple themes popular to institutional investors, combining the renewable-power industry with a home base in India, one of the world’s largest economies.
Founded in 2008, Azure Power says it installed India’s first private utility-scale solar project in 2009. It says it issued the country’s first “green bond” and that it owns and operates the largest single-site solar project in India.
It also says it was the first power company out of India to list on the New York Stock Exchange. That subjects it to U.S. securities law and regulation, something that’s typically appealing to major institutional investors.
The Caisse has been with Azure Power from its beginning as a public company, buying US$75-million of shares, at $18 apiece in its October, 2016, initial public offering. It bought more shares on the open market and also participated in several more of the company’s stock offerings.
OMERS first bought in with a US$219-million investment in August, 2021.
Both funds may have made their most serious commitment to Azure Power early this year, however. The company launched a share sale called a rights offering. The Caisse and OMERS signed a “backstop agreement” to buy Azure Power shares that went unsubscribed in the offering.
And when Azure Power announced in January that it had sold only 78.4 per cent of the rights, the Caisse and OMERS – which had already bought nearly 11 million shares at US$15.79 apiece in the offering – stepped in and bought 3.4 million more.
All told, the Caisse spent just under US$158-million and OMERS spent just under US$70-million in the offering, including the backstop shares.
As part of their ownership of Azure Power, the two funds placed employees on the Azure board.
Cyril Cabanes, the managing director of the Caisse’s Asia-Pacific Infrastructure investments business based in Singapore, has been a member of the Azure board since January, 2017. Deepak Malhotra, the director of infrastructure, South Asia at the Caisse, joined the board in November, 2019.
Delphine Voeltzel, the managing director of OMERS Infrastructure in Asia, joined the board in May.
“We, as a board, are really engaged and riled and upset and deeply engaged with this issue,” Mr. Rosling, the Azure chairman, said in the investor call. “It is clear that we need as a company to look at ourselves in a very hard way and ensure that the sort of questions you’re asking … about our controls, we can answer with speed and confidence.”
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