HAS PREPAYMENT OF SHARE-BACKED FINANCING HELPED ADANI TO RESTORE INVESTORS’CONFIDENCE?
IS THE MEDIA CORRECT TO SAY THAT THE FUTURE OF ADANI GROUP AND ITS INVESTORS IS IN JEOPARDY?
The Indian economy and the Indian Public markets have always been dominated by certain family group companies, with many of them having a history in business for over a century. Considering the historical roots of the most significant business family groups, the Adani Group was a new entrant.
The dynamics have changed.
For better or for worse, only time can tell. At the outset of this year, four of the Adani Companies were in the top 20 Indian Companies in terms of market capitalization; seven publicly traded Adani companies have a collective value of about $220 billion, greater than India’s largest company, Reliance market capitalization. As a matter of fact, for a brief period of time, Gautam Adani was the second richest man in the world.
WHAT IS THE PLEDGING OF SHARES? DID ADANI GROUP RAISE FUNDS VIA PLEDGING OF SHARES?
Pledging of shares is an arrangement where the company’s promoters use the shares as collateral to fulfill the financial requirements. To simplify, it means taking loans against the shares that one holds. Shares, being considered a type of asset, act as collateral against such loans.
The Adani group recently acquired two major companies – Ambuja Cements and ACC. Days after the acquisition, the group pledged its entire stake worth $13 billion to the Hong Kong Branch of Deutsche Bank AG.
Adani Group claimed it to be “for the benefit of certain lenders and other finance parties” and that such pledging is done with the vision of doubling the cement industry’s manufacturing capacity and becoming the most profitable manufacturer in the country.
Adani’s sudden move into the cement industry has created a stir. It has led to a rally in cement stocks in India.
Moreover, three more Adani group companies, namely Adani Ports and Special Economic Zone (APSEZ), Adani Transmission Ltd, and Adani Green Energy Ltd, have pledged additional shares to the SBICAP Trustee Company.
As a result, the shares of the Adani group companies started falling following the reports of the additional pledging of shares by the group.
Pledging of shares is a common phenomenon for companies whose shares are mostly held by promoters. The promoters raise loans against the shares mainly to meet various business requirements like the expansion of business, fulfillment of capital requirements, and starting a new venture, etc.
However, a significant portion of the shares held by promoters is pledged. In that case, it can adversely affect shareholder’s value, making pledging risky.
PLEDGING OF SHARES – GOOD OR BAD?
Generally, pledging shares is the last option for promoters to pool funds. Equity funding or taking debts are much safer options. However, if the promoters still pledge their shares, it generally means that all the other options are shut.
When the market moves upward, the investors are optimistic, and pledging may not create many issues. However, the problem occurs during an economic slowdown.
With the fluctuating price of stocks, the value of collateral also changes. In such situations, the promoters sometimes have to cover the shortfall by giving additional cash or by pledging more shares to the lender.
In the worst-case scenario, if the promoters fail to make up for the difference, the lender can sell the pledged shares in the open market to recover their money.
HERE COMES THE MAIN ISSUE – DID PREPAYING SHARE-BACKED LOANS HELPED ADANI TO RESTORE INVESTORS’CONFIDENCE?
Yes, you read it right.
The Adani Group promoters prepaid loans worth $1.11 billion (approximately Rs. 9,215 crores) and released their pledged shares in Adani Ports & Special Economic Zone, Adani Green Energy Ltd., and Adani Transmission Ltd., even though these loans were set for maturity in September 2024.
Further, the group also plans to prepay a $500 million loan to a group of banks, including Barclays, Standard Chartered, and Deutsche Bank.
The group has prepaid the loan considering the “recent market volatility and in continuation of the promoters commitment to reducing the overall promoter leverage backed by Adani listed company shares”.
The prepayment move by the Adani group was meant to reassure the investors concerned about the group’s ability to comply with the debt payments. Do you think the market is reacting positively to this reassurance?
DID ‘HINDENBURG RESEARCH REPORT’ DAMAGE THE ADANI REPUTATION?
The publishing of the Hindenburg Research Report targeting the Adani Group has raised some serious questions about the ethics and legality of Adani group companies.
The report alleges that the company has been using unethical accounting practices for its business operations to inflate profits and understate its debts.
Also, Hindenburg has accused the Adani Group of engaging in insider trading and tax evasion.
Although the Adani Group has denied the allegations and called them “baseless and defamatory,” the report has already impacted the Group’s stock prices, which have had a meltdown since the release of the report.
The group experienced sharp declines in share prices, and as a result, investor confidence was further damaged.
The loss in billions may not affect the Adani group in the long-term growth perspective because the vision of a better and greater India drives the Adani Group. Still, it has shaken the Indian Stock Market.
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