Adani FPO rout shows power of small investors

IN PERSPECTIVE

It rarely happens, but the withdrawal of the fully subscribed FPO of Adani Enterprise showed the power of the retail and small investors in India’s mature stock market. This was a market where half a dozen Adani shares were ruling the roost with unbelievably high price-to-earning ratios for three years.

As the floating stock of Adani shares was limited, short sellers were always kept at bay by loyal brokers and buyers, though the valuations were sky-high, almost two to three times the price-to-earning ratios commanded by other blue chip stocks.

The price-to-earning ratio of Adani Enterprises, 28.5 at the end of the fiscal year 2018, had crossed 200 before the FPO last week. Adani Enterprises had also raised Rs 5,985 crore at Rs 3,276 per share from its anchor investors two days prior to the FPO. They included Abu Dhabi Investment Authority, Goldman Sachs, Societe Generale, BNP Paribas, Morgan Stanley, Nomura Financial and 30 other top-notch institutional investors. Mutual funds, however, did not join the institutional investors and stayed away.

That is when a little-known giant slayer, the New York-based Hindenberg Research, brought out its devastating report, citing irregularities in Adani Enterprises and other group companies. The tiny investigative research and activist analyst group led by Nathan Anderson, in operation since 2017, has accused about 50 global corporations of malpractice and fraud and has the unique record of triggering share value collapse in three fourth of the cases. Shares analysed and targeted by Hindenberg Research are usually high-valuation companies, easy to bring down by short sellers working in tandem with the research group.

They include electric vehicle maker Nikola Corporation whose founder was found guilty of fraud for claiming that his company has made zero-emission 18-wheeler trucks, China Metal Resources Hong Kong and Standard Lithium whose plans to produce electric vehicles in Arkansas were challenged by the short seller. Interestingly, most of his targets are new energy or technology companies with high valuations.

The Hindenberg report wreaked havoc on the Indian stock markets on January 27, despite a 400-page rejoinder by the Adani group, calling it baseless. Not only were Adani group shares mauled but also retail investors, who had a 35% FPO reservation, failed to arrive, accounting for just 1% subscription on Day 1. Ignoring the poor subscription and market apprehension, the Adani Group announced that institutional investors would fill the gap if retail buyers did not subscribe.

The ports-to-power conglomerate had strong support from powerful global wealth managers who rallied behind the group. Commodity traders and large infrastructure companies like Adani are usually known for juggling finances, and institutional investors and are not uncomfortable with such practices as long as projects are delivered on time. So though the retail investors stayed away even on Day 2 of the FPO and the group’s stocks took a hammering, Abu Dhabi-based International Holding Company came out in its support and committed to investing $400 million in the $1.4 billion FPO.

The third day of the FPO saw more institutional support pouring in as India’s largest institutional investor LIC said its investment in Adani group shares had been highly profitable. Family offices of India’s top billionaires Mukesh Ambani (RIL), Sunil Bharti Mittal (Airtel), Sajjan Jindal (JSW), Pankaj Patel (Zydus) and Sudhir Mehta (Torrent) invested in the FPO in an effort to change the market sentiment. As a result of their support, the FPO was oversubscribed 1.25 times on the last day. It appeared that the Hindenberg challenge had been effectively countered by Adani Enterprises.

But the following day, the group’s shares plummeted again with retail investors driving down stocks relentlessly, making a mockery of the FPO and the institutional investors who had bought Adani Enterprise stocks at a higher FPO price band. WhatsApp groups, normally focussed on the budget speech, were busy shorting Adani group shares.

Retail investors had smelt blood. Thousands took short positions and the group’s shares plunged by 20% to 30%. After fending off the Hindenberg assault, Adani Enterprises was forced to retreat and withdraw the FPO. This showed that retail and small investors of India can’t be taken for granted any more. They have mauled over-valued startups in the past and are now ready to take on India Inc.

(The writer is a journalist and author of three books on economic governance)