Fundraising through rights issues falls sharply in January-July period

The number of rights issues and funds raised through them has fallen sharply in the first seven months of 2021. Till July 2021, only four rights issues hit the market and cumulatively raised Rs 3,623 crore. In 2020 during the same period, 11 issues had raised Rs 63,537 crore.  Even when one deducts Reliance Industries's rights issue, which raised Rs 53,125 crore, the total amount raised during the previous year in the first seven months comes to Rs 10,411 crore. And ten issues had hit the market almost thrice in terms of the quantum of funds raised and the number of issues.

Experts said promoters opt for rights issues in a  bearish market as they don't want to dilute their holdings when the valuations are unattractive. Promoters prefer to do qualified institutional placements (QIPs) when the individual stock commands an attractive valuation.

"The basic reason for a company to come with a rights issue is when they don't want to dilute their stake and raise money. The promoter is also willing to shell money for any growth, expansion, or acquisition in rights issues. In some companies, rights issues happen as a reward to shareholders by pricing the issue lower than the market price. However, the biggest motive was raising money from the existing shareholder without diluting your stake in the hope that shareholders are happy with you and are happy to give you money.,' said Prithvi Haldea, Founder, Prime Database.

Moreover, bankers said the businesses were going through some turmoil last year due to the economic shock and pandemic's impact. And there was uncertainty regarding when the markets will stabilize. Hence promoters thought it would be better off to raise some capital without diluting their stake. More than 97 per cent of the fundraising through rights issues happened in the first seven months of 2020 when the markets were reeling under the onslaught of COVID-19.

The success of Reliance Industries's rights issue and tweaks to the regulatory framework by the Securities and Exchange Board of India (Sebi) gave a much-needed fillip to rights issues last year apart from the market correction.

Shortening the time period taken to complete the transaction, electronic application, and allowing eligible shareholders to trade their rights entitlement (REs) were some of the tweaks that have given a fillip to rights offering as a fundraising instrument.

Reliance Industries RE trading generated huge volumes, allowing those who didn't intend to apply for shares in the rights issue, sell their entitlements for an attractive price.

Raising funds through rights issues was a common practice in the 90s. And according to Prime Database, between 1990 and 1996, 240 rights issues, on average, were launched every year.

However, in the last ten years, qualified institutional placements (QIPs) or preferential allotments were preferred to raise fresh capital or issue shares to promoters. The pricing for QIPs is guided by the pricing formula prescribed by Sebi, which is linked to the prevailing market price. Rights issues, on the other hand, allows companies to issues shares at any price.

"Companies would rather do a QIB and raise money at current prices. Rewarding shareholders in a bullish market is difficult as prices keep going up. The problem in rights issues by the time you announce a price and the issue opens the price goes down and hampers the process,' said Haldea.

Bankers said that from now on, if the market continues to do well, the rights issues will remain subdued but if the markets starts showing nervousness then right issues could see a revival.

"The cost of dilution has come down. Valuations have gone up, and people are willing to be more aggressive. People are getting money at too good to be true kind of valuations. Rights issues are unlikely to revive going ahead. There is no good reason for a company to convince an existing investor to put more money without changing their overall stake. If people are doing rights issues in this market, it is a clear indicator that they cannot raise money from outside. Which itself is a negative sign," said Skanda Jayaraman, head-investment banking, Spark Capital.