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Here’s what Nifty's newest entrant Adani Enterprises can do to increase its free float

Here’s what Nifty's newest entrant Adani Enterprises can do to increase its free float

Here’s what Nifty's newest entrant Adani Enterprises can do to increase its free float
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By Hormaz Fatakia  Sept 29, 2022 4:13:25 PM IST (Updated)

Analysts that CNBC TV-18.com spoke to highlighted some common options that are available on the table for Adani Enterprises while also suggesting those that are not.

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Adani Enterprises will become the second Adani Group company to join the coveted Nifty 50 index. It will start trading as a constituent of the 50-stock benchmark on Friday, September 30.
The inclusion of the company in the index will also bring in inflows worth $336 million, according to Edelweiss Alternative Research. However, inclusion in the index will now mean that the company will have to increase its share free float. A report in the Financial Times states that the company is taking steps to improve trading liquidity.
Shares of Adani Enterprises have returned over 7,000 percent to shareholders over the last five years. The rise in the share prices of group companies have propelled Gautam Adani as the third richest individual in the world.
What is a free float?
A free float, also known as public float refers to the shares of a company that can be traded publicly and are not restricted. In simpler terms, the number of shares that are available to the public for trading in the secondary market.
The Financial Times story states that Adani Enterprises' free float percentage of traded shares if 19.6 percent, while that of India's largest company by market capitalisation, Reliance Industries, is at 50.4 percent. "Reliance has a very large equity base, so they have a very large free float," Avinash Gorakshakar of Profitmart Securities told CNBC TV-18 over phone.
But why would Adani Enterprises want to increase its free float? Since it is already meeting the criteria it needs to become part of the Nifty 50 index?
Corporate Finance Institute says that institutional investors rarely invest in stocks with a smaller free float as such stocks tend to be more volatile compared to a stock that has a larger float.
Siddhartha Khemka of Motilal Oswal believes that Adani may want to increase the free float of the company to have a larger weightage in global indices like MSCI or FTSE. "A lesser free float would mean lesser weightage for them in the global indices like MSCI," he said.
So what are the options that Adani Enterprises has to increase its free float?
Promoter Dilutes Stake
As of the June quarter shareholding pattern, the promoter group in Adani Enterprises holds 72 percent stake in the company. In fact, barring Adani Ports and Adani Green Energy, the promoter Group has over 70 percent stake in all the public group companies.
Gorakshakar agrees to the fact that the Adani Group is known for keeping promoter holdings above the 70 percent mark. He believes that it is unlikely that the promoter would want to dilute his stake any further. "He would want to change the equity structure in such a way that his holding remains the same, but he will ensure that the number of shares that are available in the market increase," he said.
Khemka also believes that the promter offloading stake is an option for the Adani Group. "If you don't want to raise money for the company, the promoter can sell his stake in the market, which will increase the float," he said.
Follow-On Public Offer (FPO)
A follow-on public offer or FPO is the issue of shares to investors after the company is listed on the exchanges. Such offerings are also known as secondary offerings. Addition of new shares through the FPO will increase the company's float in the market. However, Khemka does not see that as an option since its a long procedure involving regulators.
Qualified Institutional Placement (QIP)
Public companies can raise funds from the domestic markets through a Qualified Institutional Placement (QIP). It is a route to issue shares to the public without going through the standard regulatory procedures. Qualified Institutional Buyers are the only entities that can purchase shares in a QIP. Both Gorakshakar and Khemka concur that a QIP is usually the way companies raise funds, thereby increasing the float.
Preferential Allotment
A preferential allotment of shares is considered to be the fastest way to raise capital. The companies can allot shares to only a select group of investors, and therefore does not classify as a rights issue, nor a public issue.
Stock Split
Another option on the table that Adani Enterprises has is to engage in a stock split, thereby increasing the number of shares. However, Gorakshakar says that a split is off the table as the face value of the share is already Re. 1. Adani Enterprises had split the value of its share from Rs 10 to Re. 1 in 2016. "The possibilities of a split look less. They have done what they could," he said.
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