What Explains Adani Group’s U-Turn On The FPO?

The Adani Group’s Rs 20,000 crore follow-on public offer (FPO) was in jeopardy after the Hindenburg report was released, just prior to the IPO.

As a result, not only did the shares fall by 30 per cent, but the offer which opened on 25 January, only saw a three per cent subscription by 30 January.

Even after Adani’s reply to the Hindenburg report, investors appeared unconvinced. After Adani’s response to Hindenburg’s allegations, Hindenburg said the company had only confirmed its key points, while not clarifying on some of the important issues.

However, Hindenburg is incentivised to criticise companies and managements, hence, reading too much into its opinions wouldn’t offer a balanced picture.

The Adani Group refused to reduce the offer price for FPO. An Abu Dhabi-based fund IHC, said that it would be investing $400 million in the FPO.

It appeared that the decision was correct since on the last day, the FPO was fully subscribed by investors. After the FPO was fully subscribed, the company said it would be wrong to accept investor money at a premium to the current stock price, and returned the money to investors.

After the late-night announcement, the group’s shares fell further during the morning session on Thursday (2 February).

Why Did The Company Accept Funds Only To Return Them?

One possible explanation is that the company expected share prices to rise once again after their reply to the Hindenburg report, and expected to regain investors’ faith. Hence, it decided to continue the FPO without reducing prices.

However, since share prices still continued to be lower, the group didn’t go ahead with the FPO and returned investor money.

According to an article by Forbes, there are specific facts that point towards allies helping the group complete its FPO. On the other hand, given the lacklustre response the FPO had received until the last day, it is also possible that the FPO was subscribed by the group to prevent a loss of face, since the FPO was the largest in India.

A single-digit subscription in the FPO by external investors might have signalled to the group that it needed to step in, to prevent the FPO from becoming a failure. It would also allow the company to show that it cares about investors while displaying its ability to raise money even during tough times.

Debt Investors’ Growing Worries

A part of the FPO money was to be invested in new projects, while another part was to be used to repay debt. Given that the group has a strong focus on infrastructure projects, it is necessary for it to take up debt to fund the projects.

Investors in the US, who trade Adani bonds, appear to be selling heavily. The bonds’ values have fallen to 69 cents on the dollar or lower. These bonds had rallied after the completion of the FPO, but fell back lower after the decision to return FPO funds to investors.

These distress levels are usually seen when investors believe that there could be a major impact on the business. The group’s leverage has been an oft-discussed topic in recent months, and the FPO issue appears to have made debt investors cautious.

According to reports, Credit Suisse’s private banking arm has stopped accepting the bonds of some Adani Group companies. Further, it is reported that the Reserve Bank of India is asking banks for details about their exposure to the Adani group.

After the report came out, the Hindenburg group hasn’t spoken about how exactly it went short on the bonds and other securities of the Adani group. Other short-sellers who know the group too, have been confused about how Hindenburg exactly bet on the group.

Is This The End Or The Beginning Of The Group’s Problems?

The debacle is a departure from the continuous successes that the group has achieved over the last few years. It had entered several new businesses with large investments, and the group received constant media attention.

Despite the allegations, if Adani group can make its infrastructure projects and acquisitions viable to pay debt and generate money for shareholders, these allegations wouldn’t mean much. But, perception often shapes reality, and if banks, media, and investors are sceptical of the group it might only make life tougher.

As the FPO episode showed, raising money from the public can be a difficult task, even if the stock has been one of the best wealth creators in years.

Further, regulatory bodies are reportedly stepping up their scrutiny of the group after the Hindenburg report went public, while the opposition is stepping up its criticism of the business group.

It would serve the group well to reduce its focus on growth at all costs, to focusing on profitability and corporate governance to win investor trust back.

(This article was first published here).