Promoters take advantage of rights issues

Investors have accorded a lukewarm response to rights offers from companies seeking to fund their expansion plans. But promoters appear to hold a more optimistic view.

They have used the rights route to hike their stake in companies at the current rock-bottom valuations.

The high borrowing cost of debt and shortage of funds have prompted many a company to resort to rights offers in recent months. The market, clearly, did not take to this kindly as concerns about equity dilution led to the stocks being beaten down to levels that made the rights offer price quite unattractive.

Shares of companies ranging from Tata Motors and Hindalco to Dish TV and Suzlon Energy were beaten to new lows, after rights announcements. While investors have shied away from their rights entitlements, promoters have stepped in to take up the unsubscribed portions.

Take the case of Hindalco — the promoter and promoter group companies along with other underwriters have fully subscribed to the offer after it received only about 43 per cent subscription from non-promoter shareholders. As a result, the promoter group’s stake in the company has risen from 31.9 per cent to 35.1 per cent post offer. The rights issue of Tata Motors also remained undersubscribed, providing an opportunity for the promoters to take up the rights portion. Their stake stood at 42 per cent post-offer from 33 per cent before it, bringing in a little over Rs 3,000 crore.

More lined up


Despite these offers struggling for subscription, more companies such as Jaiprakash Associates and Religare Enterprise have recently announced rights issues. The former plans to raise about Rs 1,800 crore to fund its capex plans. Interestingly, the company’s announcement to the exchange states that it plans to raise funds through the rights issue “instead of issuing further warrants to promoters on preferential basis”. The promoters have also given a firm commitment to subscribe to the unsubscribed portion, if any.

Religare Enterprises plans a rights issue priced at Rs 355, a premium over the current market price of Rs 330.

The promoter’s stake as of September 2008 stood at 54 per cent. Promoters typically raise their stake in a company, through preferential allotments or creeping acquisitions of shares, both of which are subject to Securities and Exchange Board of India regulations. Picking up the unsubscribed portion of a rights issue may well be a relatively hassle-free route to increase stake.

Incidentally, recent weeks have also seen promoters and top management in some companies such as L&T, IVRCL, Edelweiss Capital take advantage of the current market conditions to pick up shares.

Source: TheHinduBusinessLine