Adani FPO Withdrawn, Shares down by 26.7% –What next?

Adani FPO Withdrawn, Shares down by 26.7% –What next?

Gautam Adani, who was a billionaire at the start of the year, saw his wealth decline by around $65 billion from its top of $150 billion. As his entire wealth was $84.5 billion on January 31, 2023, the data indicates that he lost $36 billion in just the month of January.

On Wednesday, Adani Enterprises stock saw a 26.7% drop in price, resulting in a loss of 94,000 crore in investor wealth. Despite the successful closure of the FPO, the decline was observed. The FPO had a 20,000 crore issue size and was oversubscribed by 112%, with a price band of 3112–3276. Investments from QIB and NII were oversubscribed by 126% and 3.32 times respectively, while retail participation was only 12%. The opening price on Wednesday was Rs 2995.2.

Adani Group stock performance on Wednesday

Adani Group stock performance over last year

After the market closed, the Group announced the withdrawal of FPO in order to safeguard the interests of its investment community and address the extraordinary market conditions.

Extract of Press Release

Adani Enterprises Limited Stands by its Investors

The Board of Adani Enterprises Ltd., (AEL) decided not to go-ahead with the fully subscribed Follow-on Public Offer (FPO). Given the unprecedented situation and the current market volatility the Company aims to protect the interest of its investing community by returning the FPO proceeds and withdraws the completed transaction.

Gautam Adani, Chairman, Adani Enterprises Ltd said, “The Board takes this opportunity to thank all the investors for your support and  commitment to our FPO. The subscription for the FPO closed successfully yesterday. Despite the volatility in the stock over the last week, your faith and belief in the Company, its business and its management has been extremely reassuring and humbling. Thank you.

However, today the market has been unprecedented, and our stock price has fluctuated over the course of the day. Given these extraordinary circumstances, the Company’s board felt that going ahead with the issue will not be morally correct. The interest of the investors is paramount and hence to insulate them from any potential financial losses, the Board has decided not to go ahead with the FPO.  

We are working with our Book Running Lead Managers (BRLMs) to refund the proceeds received by us in escrow and to also release the amounts blocked in your bank accounts for subscription to this issue. 

Our balance sheet is very healthy with strong cashflows and secure assets, and we have an impeccable track record of servicing our debt. This decision will not have any impact on our existing operations and future plans. We will continue to focus on long term value creation and growth will be managed by internal accruals. Once the market stabilizes, we will review our capital market strategy. We are very confident that we will continue to get your support. Thank you for your trust in us.”  

Key Ffindings from the Hindenburg Research report on Adani

On January 24, 2023, a report was published on the Adani Group, alleging that the company was conducting the "largest con in corporate history." The report also disclosed that the authors had a short position on Adani stocks, indicating their belief that the shares were overvalued and would experience a drop in value in the near future.

Key points

1. Overvalued shares - Adani shares are highly overvalued by conventional metrics such as PE Ratio, Price/Sales ratio and EV/EBITDA.

*PE ratio of 0 implies that the company is into losses

2. Debt-fuelled business – 5 out of the 7 key listed companies mentioned have reported a current ratio of less than 1. This means that the total amount of current assets is less than the total amount of current liabilities in those companies. This means that the companies are unlikely to have adequate assets to pay off their liabilities in the next 1 year.

3. Promoters pledging their stocks – This means that the promoters of the company have taken on additional debt on the basis of the shares that they own. As seen above, the share prices are claimed to be already high and so is the debt – therefore, promoters pledging stocks to take on more debt is not a healthy financial practice in such a context.

4. Doubts regarding the management team – The report claims that some members of the management have a questionable past which includes allegations of fraud, duty evasions, scams etc. 

5. Excess promoter control of shares – It has been alleged that in addition to the already high proportion of promoter holding in shares (close to 74% in multiple cases), significant portions of the remaining public shares are also controlled by shell companies that have ties with the Adani group. Many of these companies have a large majority of their shares invested solely in firms under the Adani Group. This may mean that in practical terms, those companies may have worked their way around the SEBI mandate that requires at least 25% of the shares of a listed company to be in public shareholding. This exposes high volatility in the shares of the company due to low free float shares.

6. Pumped up demand – The preceding point also hints at deliberate pumping of the Adani stock prices through excessive buying pressure from companies that seem to be biased towards (or perhaps connected with) the Adani Group itself. It is claimed that the delivery volume of Adani stocks may have been high because of possible wash trading (ie. buying/selling of a share by the same or related entities to pump up the trading volume numbers). Rumours regarding the involvement of the noted stock manipulator Ketan Parekh have also been raised in the Hindenburg report.

7. Inadequate compliance – The report claims that one of the firms hired to bookrun the Adani Green Energy has had past problems with the SEBI. Moreover,  one of the independent auditors hired to audit Adani Enterprise and Adani Total gas seems to be too small a company and comprising professionals too young to be able to handle the auditing of such a large array of companies. 

Note: All the above claims are those made by Hindenburg Research in its report and are neither confirmed nor denied by TaxGyata

Link – https://hindenburgresearch.com/adani/

Adani Group’s response

Adani Group denies allegations in a report as "malicious misinformation" in a Twitter post on January 25, 2023. They also express concerns about the timing of the release, which coincided with Adani Enterprises' FPO on January 27, 2023 - the largest FPO in India's history. The Group stated that these allegations have been previously examined and dismissed by India's highest courts.

The Group responded with a point-by-point rebuttal of the allegations made by Hindenburg Research. 

The Group denies any fraudulent activities or manipulation of prices and addresses the issue of over-leverage by stating that its companies are highly rated and regularly monitored by the government, with promoter leverage being less than 4% of promoter holdings. Out of the 9 publicly listed entities, 8 are audited by the "Big 6" accounting firms, with Adani Total Gas soon to follow suit. The Group also highlights several other points in its rebuttal, but mentions that they will consider legal actions against those who made false allegations against the Adani Group.

Click to access Adani-Response-to-Hindenburg-January-29-2023.pdf

The Securities and Exchange Board of India’s (SEBI) examination comes on a day when Adani Group shares plunged, extending losses in seven listed companies to $86 billion in the wake of a US short-seller report.

Considering all the factors above, retailers should be careful when trading stocks in this group