If your fund-raising activities have gone haywire, don’t lose heart. Merchant bankers are working on new instruments that will allow companies to borrow at an interest rate that is 3 per cent lower than those charged on term loans by banks.
These instruments, which may hit the market within three months, will be convertibles on a rights basis, with the option to convert them into equity at a premium of 20-50 per cent over the current price anytime within 5-7 years.
These instruments are being developed by merchant bankers like Kotak Mahindra and are likely to find favour with institutional, than retail investors.
Sebi rules stipulate that companies can’t give convertible options beyond 18 months, unless it’s a rights issue. So, these will be convertible instruments on a rights basis, with an option to convert them anytime within 0-7 years.
“These instruments will offer firms the flexibility to raise money at a lower coupon rate, and are essentially being developed as local instruments in lieu of foreign currency convertible bonds (FCCBs),’’ said Seshagiri Rao, CFO, JSW.
The instruments offer investors interest, and secondly, an option, which ‘has a value’ and can be exercised by them—they can convert the convertibles at a say 50 per cent premium over the current market price anytime within 5-7 years.
Take DLF, which was trading Rs 412.90 on Monday on the Bombay Stock Exchange, down 66.29 per cent from its peak of Rs 1225 on January 15, 2007.
Now, if the markets rebound and the scrip soars to say, Rs 2000-level in two years, investors can convert this instrument at a 50 per cent premium (Rs 612) to the current price and sell the shares in the market.
Experts feel institutional investors like mutual funds and insurance companies may invest in such instruments, which are similar to partly convertible debenture issues in which a part of the issue (khoka) was placed with institutional investors, who had the option to convert it into equity within a specific period.
“It’s the same instrument, a hybrid of FCCBs and partly convertible debentures,’’ said Rao. “Convertibles will be back in vogue till there’s an upturn in the market. Institutional investors would like to buy debt, and convert them into equity,’’ said Ashutosh Agarwala, CFO (strategic finance), GMR Infrastructure.
Another instrument that could gain ground is shares with differential voting rights. These are shares on which investors enjoy lower voting rights but get a higher dividend, of say 5-10 per cent more than other shares. Investors may have one voting right for say, every ten shares and these shares quote at 75-80 per cent of the value of existing shares. Tata Motors is offering this with its rights issue.
Clearly, the downturn in equity and bond markets could catalyse a host of fund-raising innovations that will help corporates find solutions to their problems.
