Explained | What made the Adani Group call off its FPO?

People wait to cross a road in front of the logo of the Adani Group installed at a roundabout on the ring road in Ahmedabad.
| Photo Credit: Reuters

The story so far: Adani Enterprises decided on February 1 to call off its ₹20,000 crore follow-on public offer and return the money that it had collected from investors. The Adani Group has seen the stocks of its publicly listed companies crash steeply, causing its overall market capitalisation to drop by ₹9.11 lakh crore. A report by U.S. firm Hindenburg Research on January 24 had accused the Adani Group of stock manipulation and accounting fraud. The Group has denied all allegations.

What is a follow-on public offer?

An FPO is a process wherein a company that is already publicly listed in the stock market issues additional shares to investors. During an FPO, a company could decide to issue fresh shares to investors, or existing shareholders in the company could decide to sell their shares to other investors.

Editorial | Warning bells: On the Adani saga

An FPO is similar to an initial public offering (IPO), except that an IPO refers to the issuance or sale of shares by a company to investors when it taps into the public market for the very first time. Companies can float an FPO to raise equity capital for various reasons such as to pay off debt or to improve their capital structure.

FPOs can also be a way for existing shareholders to sell their shares and exit the company.

Adani Enterprises, the flagship holding company of the Adani Group, planned to raise ₹20,000 crore through an FPO that closed last week. The FPO suddenly came under scrutiny in the midst of the steep fall in the price of its stock following the release of Hindenburg Research’s report, accusing the Adani Group of several wrongdoings.

There were doubts about whether the shares offered on sale during the FPO would be fully sold as they were priced well above the market price of the company’s stock at the time.

Why did Adani Enterprises call off its FPO and opt to return money to investors?

The FPO floated by Adani Enterprises was fully subscribed, thanks to support from large institutional investors and high networth individuals. The shares were fully subscribed despite the fact that the shares were priced above their public market price. The shares that were allocated to be sold to retail investors and employees of the company, however, were undersubscribed amid the extreme volatility witnessed in the stocks of the Adani Group. Only about 12% and 55% of the shares that were allocated for retail investors and employees, respectively, were sold.

On Wednesday, Gautam Adani, chairman of the Adani Group, decided to call off the FPO and return the money saying that “it will not be morally correct” to accept money from investors in such a volatile environment and expose investors to losses.

Critics of the Adani Group speculated that the FPO that was floated by Adani Enterprises and fully subscribed last week may have been manipulated by the company. They argued that large investors may have been coaxed into investing in the FPO by the Adani Group to achieve full subscription.

The well-known U.S. billionaire investor and short seller William Ackman also noted that the FPO may have been “rigged”. In particular, critics alleged that Elara Capital (India) Private Limited and Monarch Networth Capital, companies which supposedly underwrote the FPO, are shell companies based on their ownership, operations, investment portfolio, and other characteristics. It should be noted that the report released by Hindenburg Research last month had claimed that Elara Capital and Monarch Networth Capital were used as shell entities by the Adani Group to manipulate both the stocks as well as the financials of its subsidiaries.

The Adani Group in its reply to the accusation had denied that there were any illegal transactions between the group and the alleged shell entities.

What lies ahead?

The fully subscribed FPO may have helped the Adani Group save face and prevented a complete loss of confidence in the group among investors. A failed FPO would have laid bare the group’s inability to raise capital. However, there are far bigger problems for the Adani Group than just the troubled FPO.

As the precipitous fall in the shares of the Adani Group’s companies shows, investor confidence in the group is at a low right now. Regaining the confidence of investors could turn out to be an uphill task. The loss of investor confidence can make any form of fundraising, be it in the form of equity or debt, hard for the Adani Group going forward. This could affect the group’s ability to roll over its debt and even lead to a larger crisis where it is unable to meet its debt obligations.

Lenders such as Credit Suisse have already stopped accepting bonds of the Adani companies as collateral for their loans. It should be noted that promoters of the various companies that belong to the Adani Group have pledged their shares to borrow money from banks and other entities.

In the case of Adani Power, for instance, as much as 25% of promoter shares have been pledged as collateral to lenders. As the price of the Adani stocks drop, lenders would demand more margin and turn increasingly unwilling to lend any further money to the Adani Group due to the falling value of the collateral.

Many analysts had warned about the risk involved in banks lending huge sums of money against shares since when a company is unable to fulfil its debt obligations its share price also often drops.

The first tranche of payment (worth about $500 million) of the $4.5 billion debt that the Adani Group had taken during the acquisition of ACC and Ambuja Cements last year will come due in March.

Given current market conditions, the Adani Group is expected to use cash from within the company and other means to pay or refinance the debt instead of tapping the bond market.

• Adani Enterprises decided on February 1 to call off its ₹20,000 crore follow-on public offer and return the money that it had collected from investors.
• An FPO is a process wherein a company that is already publicly listed in the stock market issues additional shares to investors.
• The fully subscribed FPO may have helped the Adani Group save face and prevented a complete loss of confidence in the group among investors. A failed FPO would have laid bare the group’s inability to raise capital. However, there are far bigger problems for the Adani Group than just the troubled FPO.