Adani Family Infuses Funds To Ambuja Cement Via Warrants Program; What Are These Lesser-Known Financial Tool “Warrants” And Why Proxy Advisors Raised Concerns Over This Purchase?

Last week, the Adani family fully subscribed to the Ambuja Cement’s warrants program after infusing an INR of 8,339 crores (83.39 billion) to raise a stake in the business firm by 3.6 %. This third round of investment, following similar rounds on October 18, 2022, and March 28, 2024, of  Rs 5,000 crore and Rs 6,661 crore, respectively, completes the family’s 200 billion rupees investment in the cement company that Adani Group bought from Swiss building materials giant Holcim in 2022. 

The Adani family has increased its stake by converting warrants into shares. 

In October 2022, Ambuja Cements issued warrants worth Rs 20,000 crore to the Adanis on a preferential basis at INR 418.87 per share. Initially, the company got 25% of the issue, i.e. 5,000 crores as the compulsory upfront payment. On March 28, 2024, the group paid INR 6,661 crore towards part of the shares’ issuance. This payment completes the full subscription of warrants bought by the Adani family from Ambuja Cements. The total amount poured by the Adani family now counts at INR 20,000 crore, and their total stake in the cement entity stands at 70.3 %, which was earlier 66.7 %, the company said.

The following were the transaction’s advisors.

• Standard Chartered Bank.
• MUFG Bank.
• Mizuho Bank. 
• Barclays Bank PLC.

How will this pouring of funds create a strong bridge for Adani in the cement industry?

Strong rivalry in the Indian cement business has prompted entities to hurry to increase production capacity as demand for construction materials remains strong. This investment aims to increase the cement vertical’s capacity to 140 million tonnes per annum ( MTPA) by 2028  from around 76 MTPA as of December end. It will also help other strategic initiatives, like debottlenecking capex, to improve operational performance and provide efficiency to the resource supply chain.

This influx of money gives Ambuja capital flexibility for rapid expansion, capital management efforts, and best-in-class balance sheet strength,” said Ajay Kapur, CEO of Ambuja Cements. It not only symbolises the unwavering belief in the company’s vision and business model, but also reinforces the company’s commitment to delivering long-term sustainable value creation to the stakeholders, which will propel the firm to set new benchmarks, accelerate growth and continue to deliver on operational excellence, business synergies, and cost leadership.”

However, this route of infusion of funds by Adani family via purchase of warrants is not appreciated by many? Why and by whom?

The Adani family purchased Rs 20,000 crore in Ambuja Cements warrants through Mauritius-based Harmonia Trade and Investment Limited. It paid only Rs 5000 crore, or one-quarter of the total acquisition sum, and received the right to subscribe to the balance at the same price within 18 months. 

Also, Ambuja Cement is not the only company that has received the injection of funds through warrants. Another Adani firm follows the same process. On January 29, 2024, Adani Green Energy Limited (‘Adani Green’), the Adani Group’s renewables segment, announced a significant INR 9350 crore (US $1.125 billion) funding of the company by the Adani family.

Adani Green is a publicly listed firm. This investment, one of the largest of its kind in Indian markets, is part of the Group’s continuous efforts to decrease debt and boost investor confidence following the Hindenburg Research report last year.

On the day of the announcement, Adani Green stated that two family-owned companies, Adani Properties Private Limited and Ardour Investment Holding Limited, invested the funds in Adani Green; however, they only paid INR 2338 crore ($281 million), a quarter of the amount promised, as mandatory in warrants program.

The reason they did not invest the entire $1.125 billion is that the family did not purchase ordinary shares in the company, which would have obliged them to pay the full price upfront. Instead, they bought an unfamiliar financial instrument, “warrants,” which allows them to pay only one-quarter of the value of a warrant now and the remaining amount at a later date of their choosing within 18 months. The company calculates the value of a warrant using standards established by the SEBI, which considers historical movements in the share price.

In both the above cases, the proxy advisory firm IIAS (Institutional Investors Advisory Services) has recommended investors vote against these purchases, saying it does not support the choice of warrants instead of equity brought upfront for the fund infusion. In its report, IiAS stated that it does not support the issuance of warrants to promoters since it “allows them to ride the stock price for 18 months”. The buying of warrants by Adani family firms is concerning for two reasons, as IIAS red-flagged in a recommendation to its clients. 

One, this brings uncertainty on whether the Adani family will actually pay the full promised amount, which would have consequences for whether the firm will be able to service its debt and make capital expenditures in the near future. “As a result, if the promoters decide not to subscribe to the remaining 75%, it could have significant ramifications for the company’s debt repayment/capex plans,” the IiAS note noted.

However, it made the payment in the case of Ambuja Cements. The case of Adani Green will be examined 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, 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. 

Considering the example of Ambuja Cement, At the start of February, Ambuja shares were already up to Rs 555, 33% more than the price of the warrants at the time of acquisition. Furthermore, the stock had rallied 40% by the beginning of March, and the price pattern indicated that the surge might not be over yet. The stock rose from Rs 442 on December 1, 2023, to Rs 618 on March 2, 2024, indicating an upside.

Tracking the pace, the cement stock reached a record high of Rs 621 on March 2, 2024. On the weekly charts, it has been steadily rising since consolidating above 400 levels between September and November 2023. Now, to exercise the warrants option, the Adani family paid Rs 15,000 crore (approximately US $1.8 billion) by the deadline in two tranches. Their total investment of Rs 20,000 crore is now estimated to be worth Rs 26,473 crore, representing a 32% increase of Rs 6473 crore or $778 million.

Even more, based on the stock price just before the deadline of April 18, an article in Business Standard anticipated a notional gain of approximately Rs 9,869 crore. As said earlier, the warrants were originally granted at Rs 418.87 per unit, totalling Rs 20,000 crore; however, the then-current market price of Ambuja Cements’ stock was at Rs 625.55 per share, valuing the converted shares at Rs 29,869 crore.

In terms of Adani Green, Adani Green’s share price closed at Rs 1899 on 14 February 2024, more than 25% above the SEBI warrant price set in December 2023.According to the terms of Adani Green’s money infusion announcement to its shareholders, two Adani family firms will purchase 63 million warrants for Rs 1480.75 apiece.

Each warrant is convertible to one ordinary share of the corporation at any time within 18 months after purchase. At the time of subscription, each warrant costs Rs 370.19 (or 25% of the warrant’s total value). The remaining 75% value (Rs 1110.56) can be paid upon conversion of the warrant to equity shares. The family has the option of converting warrants to shares in any number of tranches over the course of 18 months.

The total price of the warrants, Rs 1480.75, is almost equal to the price of Adani Green shares in December 2023. If the company’s stock price rises in the future, the family can convert their warrants, pay the balance price, and reap immediate windfall returns as if they had purchased the share at the earlier, cheaper price. And if the price falls (as it did following the release of the Hindenburg report), they can choose not to pay the remainder and avoid the danger of losing more money in the company. In other words, the family company can profit financially if the share price rises, but it is protected from the full impact of price declines.

The bottom line.

There are caveats that apply to the purchase of warrants. The first is that if the promoters do not pay the remaining 75% of the warrants’ value within 18 months of purchasing them at 25% of their value, that 25% is forfeited. The other limitation is that promoters cannot sell shares converted from warrants for three years after they are converted. This means that the company’s advantages from conversion are just on paper and cannot be quickly converted into cash.

According to brokerage firm Angel One, while most retail investors view share warrants to be a positive act because promoters are investing capital, in reality, they see it as a simple act of insider trading timed appropriately. The retail brokerage states that they believe preferential warrant issuance benefits promoters more than retail or minority shareholders. Promoters can make significant gains on investments made at a lower than market price.

Indeed, according to an article in The Economic Times, several warrants have been issued in India in the last year, but by little-known companies worth a fraction of the two Adani Group entities. While issuing warrants is legal under Indian stock market regulations, it is generally regarded as an indication of poor governance. While the Adani group vehemently disagreed with all the allegations charged upon them by Hindenberg, these timely actions raise questions over the company’s activities that are framed to reap benefits at the cost of retail investors!