Rebound in Adani group stocks key to Rs 20,000-crore FPO's success

All eyes would be on Adani group shares when the markets open on Monday, with the fate of the Rs 20,000-crore follow-on public offer (FPO) of the flagship firm, Adani Enterprises (AEL), hanging in balance following a Rs 4.2-trillion rout in group stocks in two days.

While the company said it is confident about the FPO’s success, a rebound in stock prices holds the key in attracting investors, said market players. The FPO managed to garner bids worth Rs 150 crore on its first day amid an 18 per cent crash in AEL’s stock. Shares of AEL last closed at Rs 2,769 apiece. Its shares are now 11-15 per cent cheaper than the offer price in the secondary market. The price band for the FPO is Rs 3,112- 3,276 per share.

The company has dismissed a report by news agency Reuters that its investment bankers are looking to extend the issue dates and lower the floor price. “The FPO is going as per the schedule and the announced price band. There is no change in either the schedule or the issue price. All our stakeholders, including bankers and investors, have full faith in the FPO. We are extremely confident about the success of the FPO,” AEL said in a statement following the news report.

Investment bankers said it is pre-emptive to conclude that the issue structure would be altered as the FPO remains open for two more days.

“Attracting investors when the secondary market price slips into a discount is a challenge. However, it is too early to say the FPO price will get reduced. Typically, such decisions are taken at the close of the final day. Price reduction and date extension is an option given in the regulatory framework for any share sale that fails to reach adequate subscription levels,” said an investment banker.

AEL’s FPO -- the largest-ever in the domestic market -- is scheduled to close on Tuesday, a day before the Union Budget.

So, what are the options available for the Gautam Adani-led firm in the event the issue remains undersubscribed?

According to legal experts, just like for an initial public offering (IPO), the FPO price band, too, can be lowered by up to 20 per cent. Whenever any company exercises this option, the issue date has to be compulsorily extended by three working days.

The price cut, if any, is only applicable to FPO applicants and not anchor investors, from whom AEL has already got commitments worth Rs 5,985 crore at Rs 3,276 apiece.

Furthermore, the company isn’t allowed to reduce the number of shares being offered and the only reduction in an issue size can to the extent of price cut.

Assuming AEL reduces the offer price by 20 per cent, only the main book, which is worth Rs 14,015 crore (Rs 20,000 minus Rs 5,985 crore raised from anchor investors), will reduce to about Rs 11,212 crore. And the revised issue size will work out to Rs 17,197 crore.

For the FPO’s success, AEL has to ensure that at least 90 per cent of the shares on offer are subscribed and this could work out to less than Rs 16,000 crore.

In the past, there have been instances when IPO price bands have been trimmed or expanded following a lukewarm response from investors.

Primed for short-covering

Some experts said shares of the Adani group could rebound in the coming days, given the intense short-selling over the past few days. A trader shorting (naked selling) a stock has to purchase it again to close the trade. Typically, the share price gets propelled whenever a large number of traders look to cover their shorts.

“Given the number of shorts created in the system, there will be upward pressure on the stocks whenever all these positions are covered,” said Deven Choksey, founder and promoter, KRChoksey Holding, adding that the success of the FPO is key for the infrastructure development in the country.

As both Adani Enterprises and Adani Ports are part of the F&O segment, as well as the benchmark Nifty50, there are no circuit filters on them. On Friday, shares of Adani Total Gas, Adani Transmission, Adani Green, and Adani Power hit their lower limits. Over the weekend, the BSE lowered the so-called ASM grade for Adani Power, which means traders would be required to pay higher margins while dealing at the counter.