The Adani family has infused funds into publicly-listed companies of the Adani Group through a financial instrument that is commonly used in India by small or little-known companies and which has been criticised as a sign of poor governance. The instrument, known as ‘warrants’, enables the purchaser to make a part purchase of shares, retaining the right to complete the purchase (or not) at a later date. The concern is that the Adani family has the ability to ‘ride the stock market’ in completing its purchase of additional shares in Group companies.
On 29 January 2024, Adani Green Energy Limited (‘Adani Green’), the renewables arms of the Adani Group, announced a massive INR 9350 crore (US $1.125 billion) infusion of funds into the company by the Adani family. (Adani Green is a publicly-listed company.) This infusion, among the largest of its kind in Indian markets, is part of the Group’s ongoing efforts to reduce debt and improve investor confidence following the Hindenburg Research report last year.
On the day of the announcement, Adani Green said that two family-owned companies – Adani Properties Private Limited and Ardour Investment Holding Limited – infused the funds into Adani Green, but they paid only INR 2338 crore ($281 million), a quarter of the promised amount.
This may sound unusual but it was not unexpected. It was exactly what the terms of the infusion described. The reason they did not fund all the $1.125 billion is that the family has not bought ordinary shares in the company, which would have required them to pay the full amount upfront. Instead, they bought a different financial instrument called ‘warrants’, which allows them to pay only one quarter of the value of a warrant upfront and pay the rest at a later date of their choosing, within 18 months. The value of a warrant is calculated by the company according to guidelines set by the Securities and Exchange Board of India (SEBI) that account for historical movements in the share price.
The buying of warrants in Adani Green by Adani family companies is concerning for two reasons, as Institutional Investor Advisory Services (IIAS), a proxy advisory company in India, red-flagged in a recommendation to its clients. One, this brings an uncertainty over whether the Adani family will actually raise the full promised amount, which would have consequences for whether the company will be able to service its debt and make capital expenditures in the future.
The second concern is that buying warrants would allow the Adani family to ‘ride the stock price’ of Adani Green for the next 18 months. This could be the more serious allegation, given that one of Hindenburg Research’s main accusations against the company, and which is also subject to an investigation by SEBI, is the alleged manipulation of the company’s share prices by entities with associations to the Adani promoter group. It is an allegation that deserves a closer look, especially as another warrants issue by the family is nearing its 18-month deadline and could land them a $778-million profit.
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How do warrants work?
As per the terms of the funds infusion announced by Adani Green to its shareholders, two Adani family companies would buy 63 million warrants for Rs 1480.75 each. Each warrant can be converted to one ordinary share of the company any time up to 18 months from buying the warrant. Each warrant can be purchased for Rs 370.19 at the time of subscription (or 25% of the full value of the warrant). The remaining 75% value (Rs 1110.56) can be paid at the time of conversion of the warrant to equity shares. The family can convert warrants to shares in any number of tranches through the 18 months. If warrants are converted to shares, then the total number of shares in the company will increase.
Here’s why it can help the family ‘ride the stock price,’ as the IIAS feared.
The full price of the warrants, Rs 1480.75, is equivalent to roughly the price of Adani Green shares in December 2023. If the stock price of the company increases in the future, the family can convert its warrants, pay the balance price, and make immediate windfall gains as if they had purchased the share at the earlier, lower price. And if the price crashes (as it did following the Hindenburg report release), they can choose not to pay the rest and avert the risk of losing further money in the company. In other words, the family company can make a financial gain if the share price goes up, but is insulated against the full impact of prices going down.
There are caveats that apply to the purchase of warrants. The first is that, if the promoters fail to pay the remaining 75% of the value of the warrants within 18 months of the purchase of the warrants at 25% of their value, then that 25% is forfeited. The other caveat is that promoters cannot sell shares converted from warrants until three years after they are converted. This means that gains made by the company upon conversion apply on paper only and cannot be immediately earned in cash.
The share price of Adani Green closed at Rs 1899 on 14 February 2024, over 25% above the warrant price that was set by SEBI in December 2023.
Although IIAS recommended that investors reject the proposal, the shareholders that voted in favour of the plan represented 99.9% of the shares owned by the Adani Green investors that voted. It’s worth noting that the Adani family owns 56.37% of the company and its French partner TotalEnergies owns another 20%.
Ambuja Cements: another warrant purchase by the Adani family
In a case similar to that of Adani Green, the Adani family took the warrants route to infuse funds into Ambuja Cements, one of India’s largest cement companies, which they acquired in a surprise announcement in 2022.
The family, through Mauritius firm Harmonia Trade and Investment Limited, bought warrants into Ambuja Cements worth Rs 20,000 crore (US $2.4 billion). It paid only Rs 5000 crore or one quarter of the total acquisition amount, earning instead a right to subscribe to the balance at the same price within 18 months. The deadline of 18 April 2024 is nearing, and Ambuja shares are already up to Rs 555, 33% above Rs 418.8, the price of the warrants at the time of their purchase. To exercise the option, the family needs to bring in Rs 15,000 crore (about US $1.8 billion) by the deadline. However, if they do, their total investment of Rs 20,000 crore would be worth Rs 26,473 crore, a gain of Rs 6473 crore or $778 million (32%).
This move was also opposed by institutional investors. IIAS recommended that clients vote against the proposal, saying it would allow the Adani family to ‘ride’ the stock price. Reliance Nippon Life Insurance Company, Bharati AXA Life Insurance and Sundaram Mutual Fund echoed these concerns and voted against the proposal, as per voting disclosures available on their websites. Reliance Nippon said ‘we do not favour preferential issue of warrants to promoters since it gives promoters the option to ride the stock price for 18 months’. The insurer added (in a disclosure published on its website), ‘subsequently, if the promoters decide not to subscribe to the remaining 75%, it could have material implications for the company’s long-term plans. We do not encourage warrants to promoters and rather all the money be brought in up front’. The other investors gave similarly worded opinions.
While issuing warrants is legal under India’s stock market regulations, it is usually seen as sign of poor governance.
‘While most of the retail investors consider share warrant as a positive act as promoters are investing funds, in a real sense we would say it is just a simple act of insider trading timed accordingly,’ according to an opinion by Angel One, a stock-brokerage firm in India. ‘There is a lot to read between the lines when such allotments are made.’
Another investment professional, requesting anonymity to avoid being seen as criticising the powerful Adani Group, said ‘issuing warrants is not uncommon in Indian markets, but it is unusual for a company of this size to do so’.
Indeed, while there have been several warrants issued in India in the last year, according to a report in The Economic Times, these have been by little-known companies worth a fraction of the two Adani Group companies.
