Pref preference

Time taken for making preferential allotments must be reduced

According to news reports, the Securities and Exchange Board of India (Sebi) has asked stock exchanges to put on hold, until further notice, the listing of shares that were allotted recently on a preferential basis.

This has happened because quite a few companies including Pantaloon Retail and Television Eighteen have recently made preferential issues to promoter groups, who at the same time have sold shares in the market at a higher price compared with the allotment price.

For instance, in Pantaloon's case, there was a sale of 8.5 lakh shares in early November at the rate of around Rs 275 per share. But soon after that, the promoter group could acquire shares through the preferential issue route at just Rs 112 per share.

One argument in the favour of the promoter group for adopting such a route is that there is an infusion of funds into the company without diluting their own stake. But then, because of the price differential, it so happens that the promoter stake actually increases.

In some extreme cases like that of Pantaloon Retail, since April 2002, promoter holding has gone up from 38.8 per cent to over 46 per cent (by the time preferential debentures are converted into shares).

According to Sebi regulations, the base date to be used for the calculation of the minimum price is the date of the general shareholders meeting when the preferential issue is approved.

The company is then given a time of three months to make the preferential issue. It's because of this three-month time lag that promoters stand to gain, especially with share price on the rise. In order to curb the misuse of preferential allotments, this time lag needs to be reduced.

Sesa Goa to join the fun

Iron ore producers are making merry as iron ore prices have increased around 73 per cent over the last one year to current levels of around $45-50 per tonne. What's more, the increasing shortage of iron ore promises to keep prices high, courtesy China.

A new factor has further improved the profitability prospects in the near-term as companies like National Mineral Development Corporation consider a change in the pricing policies.

The norm currently is an annual long-term contract for supply of iron ore. The companies now want a mid-year review of prices on the long-term contracts adding to the worries of domestic steel producers.

While the companies currently have fixed price long-term contracts for exports, which cannot be changed, companies like the National Mineral Development Corporation intend to recover the higher prices from the domestic steel producers. That, however, may not be an option for Sesa Goa since more than 70 per cent of its sales come from the export market.

Nevertheless, the benefit of rising global iron ore prices will be seen in the Sesa Goa's performance as negotiations for 2004 supply are finalised in the near-term.

The company received a 9 per cent price increase for 2003 and with demand surging, the price increase for 2004 should be higher.

Higher increase in prices is also possible because exports from Brazil (the second-largest producer of iron ore after Australia) to China have been hindered due to high freight rates. As a result, Brazilian exports have become uneconomical for the Chinese importers.

India therefore, is now the best source of cheap iron ore. Another opportunity for growth is the acquisition of mining rights, which will result in both volume as well as price growth.

But these are over the longer term. The growth on a consolidated basis will be greater since the company has two subsidiaries manufacturing pig iron and metallurgical coke, commodities that have seen the biggest jump in prices at the international level.

With contributions from<b><font color="red">Mobis Philipose</font></b> <i>and</i><b><font color="red">Sameer Ranade</font></b>