The Hindu breaks down all the jargon related to the Hindenburg Research-Adani case. Click here to read more about Hindenburg Research and the process of short selling.
What is a Follow-on Public Offer (FPO)?
An FPO is a process by which a listed company issues new shares to investors, as opposed to an Initial Public Offering (IPO) which involves a private company transitioning to the public sector and issuing shares to investors for the first time.
FPOs give companies the opportunity to raise more capital without borrowing after already doing so through an IPO.
There are two main types of FPOs — dilutive and non-dilutive. Dilutive FPOs involve the addition of new shares, while a non-dilutive FPO means thatshares that were previously held privately are publicly sold. Dilutive FPO reduces the shareholding of existing investors. Non-dilutive FPO increases the total number of the company’s shares available in the public domain but not the total number, hence not affecting the shareholding of existing investors.
In a rare move, the Adani Group called off its ₹20,000 crore FPO on February 1. In a statement, Adani Enterprises said: “Given the unprecedented situation and the current market volatility the company aims to protect the interest of its investing community by returning the FPO proceeds and withdraws the completed transaction.”
What is market capitalisation?
Market capitalisation (or market cap) is the total value of a company’s outstanding shares. The market cap of a company is calculated by multiplying the number of outstanding shares of a company by the price of each share. Although it is sometimes used interchangeably with market value, the latter is a more complicated metric.
Since it is based on fluctuating stock prices, market cap of a company tends to change multiple times in a day.
What are outstanding shares?
All shares of a company that are issued and publicly traded on the market form the company’s outstanding shares. This also includes restricted shares — shares that have certain stipulations attached to their ownership.
What are circuit breakers in share markets?
In 2001, the Securities and Exchange Board of India (SEBI) implemented “index-based, market-wide circuit breakers” which temporarily halt trading on an exchange. SEBI’s circuit-breakers are applied at three stages of the index movement – 10%, 15%, and 20%. Circuit breakers are automatically triggered to curb panic selling and prevent market crashes when trading prices hit certain predefined stages.
Circuit breakers | Photo Credit: NSE India
The lower circuit is the lowest the price of a stock can go on a trading day. Similarly, the upper circuit is the highest limit a stock price can touch.
Since the Hindenburg Research report was made public, shares of companies in the Adani Group have hit the lower circuit multiple times.
Who are qualified institutional buyers (QIBs)?
According to SEBI’s Disclosure and Investor Protection (DIP) guidelines, a qualified institutional buyer (QIB) is any of the following:
- public financial institution as defined in section 4A of the Companies Act, 1956;
- scheduled commercial banks;
- mutual funds registered with the Board;
- foreign institutional investor registered with SEBI;
- multilateral and bilateral development financial institutions;
- venture capital funds registered with SEBI;
- foreign venture capital investors registered with SEBI;
- State Industrial Development Corporations;
- an insurance company registered with the Insurance Regulatory and Development Authority (IRDA);
- a provident fund with a minimum corpus of Rs. 25 crore;
- a pension fund with a minimum corpus of Rs. 25 crore;
- National Investment Fund
Essentially, QIBs are investors who invite comparatively lesser scrutiny from authorities on account of their financial wealth and expertise, and utilise that to evaluate and invest in stock markets.
The Adani Enterprises Ltd. FPO received bids for 1.12 times the 4.55 crore shares on offer, according to cumulative demand data on the BSE website. While QIBs led by foreign institutional investors (FIIs) sought 1.26 times the shares offered to them as a category, non-institutional investors (NIIs) bid for 3.32 times the stock reserved for them as a class, placing bids exceeding ₹10 lakh seeking to buy 4.97 times the shares offered to them.
What is stock price appreciation?
In simple terms, stock price appreciation is the increase in the value of a stock over a period of time. Appreciation in the value of a stock is not necessarily a bad thing.
In its report, Hindenburg Research says that Gautam Adani has “amassed a net worth of roughly $120 billion, adding over $100 billion in the past 3 years largely through stock price appreciation in the group’s seven key listed companies, which have spiked an average of 819% in that period”. According to the short seller, this is unjustified based on the financials of the group and hence should merit scrutiny.
What is lending value?
Bonds are fixed-income instruments, which means that they return fixed periodic interests to investors. The entire principal invested is also returned to the investor once the investment reaches maturity. They are loans made by an investor to borrowers, typically companies and organisations, to finance operations. Individual investors can become lenders by acquiring bonds issued by companies, governments, and so on.
A zero-lending value means that bond- holders can no longer use their instruments to avail of loans by presenting the bond itself as collateral.
On Wednesday, Swiss lender Credit Suisse stopped accepting bonds by Adani Group companies as collaterals for margin lending and assigned it a “zero-lending value”.
Who are high net worth individuals (HNIs)?
In India, individuals who have more than ₹5 crores to invest are categorised as high net worth individuals (HNIs).
According to HDFC Bank, there were close to 2,70,000 HNIs in India in 2017.
What is capEx?
CapEx, or capital expenditure, are the funds used by a company to purchase or maintain physical assets.
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