Oversubscription provision overshadows base issuance in recent debt offers

An option for retaining oversubscription is said to have originated following an issue by the Green Shoe Manufacturing Company founded in 1919. For the first time, it reportedly introduced a clause for overallotment of the securities it was offering to the public. This ‘green shoe’ option has subsequently been used as a measure to mop up extra capital by selling additional securities, equity or debt when demand is greater than expected.

A 100 years later, 2019 has seen a number of debt issuances exhibiting a phenomenon where the provision for oversubscription outstrips the base issue. In other words, the mechanism for mopping up any additional capital that flows into an issue has a greater size than the issue itself.

Mahindra & Mahindra Financial Services had a recent Rs 500 crore debt issue, with Rs 3,000 crore being the oversubscription amount.

India Infoline had a base amount of Rs 250 crore and oversubscription portion of Rs 1,750 crore.  
 

Another firm promoted by the Edelweiss group, ECL Finance, had a Rs 250 crore base amount and a Rs 750 crore quota for oversubscription.

A number of similar issues have hit the market in the last three-four months. All of them have an oversubscription quota which is equal to, or a multiple of, the base amount. This can lead to high reported oversubscription of the base amounts.

Ashish Shanker, executive vice-president and head of investments for Motilal Oswal Wealth Management, said higher oversubscription quotas are a function of recent market uncertainty. Firms are unsure in today’s environment of how much they will be able to raise.  

The higher oversubscription quotas are also because many firms would be happy to take on any additional capital that comes their way, as there is a risk that liquidity could tighten again in the days ahead with elections in May, according to Shanker, who advises wealthy clients on if they should subscribe to such offerings.

“Obviously these guys are coming to the retail market because the institutional market has been tighter after the non-banking financial company (NBFC) crisis,” he said.

Funding has been tight for the NBFC sector after lending major Infrastructure Leasing & Financial Services defaulted on its obligations in September.

Mahendra Kumar Jajoo, head-fixed income at Mirae Asset Global Investments (India), agreed that after the recent crisis, issuers are looking to diversify their sources of funding. They are looking to tap the retail market, but are being conservative in their approach.

“This means there is a lot of uncertainty and they are not sure of market interest,” he said.

An investment banker handling such issues said that a lower base amount also ensures the minimum subscription norms are more easily met. Not meeting the minimum requirement would mean the issue has to be refunded.

The Securities and Exchange Board of India’s (Sebi’s) June 2014 circular says companies must ensure that at least three-quarters of the base issue is subscribed.

“…if the issuer does not receive minimum subscription of its base issue size (75 per cent), then the entire application monies shall be refunded within 12 days from the date of the closure of the issue,” it said.

Delays would also mean a high-interest rate is paid to investors. 

“In the event, there is a delay, by the issuer in making the aforesaid refund, then the issuer shall refund the subscription amount along with interest at the rate of 15 per cent per annum for the delayed period,” said the Sebi circular.