Adani Encumbers $13 Billion Stake in Newly Bought Cement Units

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Billionaire Gautam Adani’s group set aside shares valued at about $13 billion in two Indian cement firms as part of a lending agreement, reflecting the world’s second-richest person’s hunger for capital as his ports-to-power conglomerate expands rapidly.

Stakes in two of those companies — about 57% of ACC and 63% in Ambuja Cements — have been encumbered “for the benefit of certain lenders and other finance parties,” according to separate filings made to Indian stock exchanges by Deutsche Bank’s Hong Kong branch.

The transaction is a so-called non-disposal undertaking, which is essentially a way for companies to borrow funds against their shares. In most NDUs, the borrower promises not to sell or transfer shares unless there is a trigger event like a missed payment. This results in what’s called ‘encumbered shares.’ The agreements are “in the nature of” a negative lien given in favor of a lender, and can be terminated upon the request of both parties, according to a 2017 circular by the Securities and Exchange Board of India.

“NDUs are liens typically used by the borrowers to fulfill the management-control clause in the lending process,” said Girish Rawat, a partner at Luthra & Luthra Law Offices in New Delhi. The founder stake is generally marked as a lien, which disallows any selling, thus ensuring there’s no change in control, according to Rawat.

The transaction comes as the tycoon’s ambitious dealmaking in an array of new sectors from green energy to media raises concerns over the high level of debt across the Adani group. While the conglomerate has moved to curtail share pledges across its listed entities, other units continue to have elevated leverage ratios that stand out among peer companies globally.

Buyouts from Holcim earlier this year marked Adani’s entry into the cement business and the tycoon plans to double his company’s annual capacity by 2027 following the deal that’s made his conglomerate India’s second-largest producer of the construction material.

The acquisitions give Adani Group access to about 110 billion rupees ($1.4 billion) of cash with the two listed companies, according to Jefferies Financial Group Inc. Along with a 200 billion rupee fund infusion from their new owners, the combined entity has enough of a “war chest to scale up new expansions, organically or inorganically,” Prateek Kumar, a Jefferies analyst, wrote in a note on Monday.

Based on Monday’s close, the encumbered stake in ACC and Ambuja is valued at $13 billion. Endeavour Trade and Investment and Xcent Trade and Investment Ltd., entities linked to the Adani Group, are part of the agreements. In August, Endeavour Trade received approval from India’s antitrust agency to buy a stake in Holderind Investments, a Mauritius-based holding company of Holcim’s India unit.

“An NDU generally doesn’t give the lender a right over the shares,” said Makarand Joshi, founding partner of Mumbai-based MMJC and Associates, a corporate compliance firm. “It’s not a security, while lien or a pledge are used to secure a loan, where lender gets the control.”

Adani’s move into cement and the recent easing of commodity prices has led to a rally in cement stocks in India. ACC and Ambuja shares surged about 30% and 60% through yesterday since Holcim’s sale was announced in May.

Stocks of most companies controlled by the Adani Group declined on Wednesday, as the MSCI India Index lost as much as 1%. ACC, Ambuja Cements and Adani Enterprises, the group’s flagship firm, each fell as much as about 7%, while Adani Ports and Special Economic Zone dropped as much as 5.5%.