Follow-on Public Offering

Adani Group called off the Rs 20,000 crore follow-on public offering (FPO) of its flagship firm, just a day after it was fully subscribed. The company came out with a statement, saying that its board decided not to proceed further with the public offer (FPO) in the interest of its subscribers.

What is a ‘Follow-on Public Offering’?

• An FPO is a process wherein a company that is already publicly listed in the stock market issues additional shares to investors. It is similar to an initial public offering (IPO), except that in IPO the issuance or sale of shares is done for the first time.
• 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.
• FPOs can also be a way for existing shareholders to sell their shares and exit the company.
• Companies can float an FPO to raise equity capital for various reasons such as to pay off debt or to improve their capital structure.
• Types –
  • • Diluted FPO —
      • • There is dilution in the ownership of existing shareholders.
        • Here, the company decides to issue new shares to the public which increases the total number of shares outstanding.
        • When there is an increase in the number of shares, the ownership percentage of existing shares decreases since newly issued shares will also represent a certain proportion of ownership in the company.
    • Non-Diluted FPO —
      • • There is no dilution in ownership of existing shareholders because no new shares are issued.
        • The shares which are offered to the public are shares that are held by non-public shareholders.
        • Usually, these shareholders are Promoters, Directors of the company, or Pre-IPO investors.

Key points in the Hindenburg Research report on Adani Group –

• Overvalued Shares –
  • The report cites data from FactSet and Hindenburg’s own analysis to claim that the Adani shares are highly overvalued by conventional metrics.
• 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 is not a healthy financial practice as this means that the companies are unlikely to have adequate assets to pay off their liabilities in the short run.
• 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.
• 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.
• Excess Promoter Control of Shares –
  • 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.
• 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.
    • Wash trading is the practice of buying/selling of a share by the same or related entities to pump up the trading volume numbers.
• Inadequate Compliance –
  • The report claims that one of the firms hired to book run 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.
    • It comprises of professionals too young to be able to handle the auditing of such a large array of companies.