PurposeTo propose and adaptive nonlinear controller for adjustable speed sensorless induction motor drive, using a novel adaptive rotor flux observer. The adaptive flux observer scheme in this paper provides the simultaneous estimation of the rotor speed, rotor resistance and stator resistance.Design/methodology/approachThe IM rotor speed and rotor flux controllers are designed based on combination of input‐output feedback linearizing, linear optimal feedback control and sliding‐mode (SM) control methods. In addition a novel adaptive rotor flux observer is designed based on Lyapunov theory. The proposed control method is tested by simulation and experimental results.FindingsThe composite rotor speed and rotor flux observer in combination with adaptive rotor flux scheme guarantees a perfect speed, torque and flux tracking control for the IM sensorless drive.Research limitations/implicationsThe proposed control method has a drawback in the IM low speed operating region. Additional research may be able to solve this problem as well as should analyze the sensitivity of the IM drive system performance with respect to variation of the system controller and adaptive flux observer gains. In addition, this research should also analyze the influence of sampling rate, truncation errors, measurement noise, simplifying model assumption and magnetic saturation.Practical implicationsThe proposed control method can be used for adaptive and robust control of the IM drive where an optimal efficiency is desired subject to the variable load torque demand.Originality/valueBased on Lyapunov theory, a novel adaptive rotor flux observer is introduced in which the rotor speed, rotor resistance and stator resistance are treated as the unknown constant parameters.