India Inc is increasingly looking at raising funds through rights issues for funding expansion plans and retiring debt, as other funding options are drying up.
The cost of borrowing has gone up and markets have turned volatile, making bank loans expensive (interest rates of 13-14 per cent) and keeping institutional investors away from Qualified Institutional Placements (QIPs), popular till not long before.
Saurabh Mukherjea, head of equities from Ambit Capital, said, “In a weak environment when the demand for the stock is not there, the only community that companies can revert for fund raising are the current shareholders, as they are the only ones who are willing to take up the stock.”
| RIGHTS ISSUE ASPIRANTS | |||
| Company | Offer type | Amount (Rs cr) | Date of announcement |
| Bajaj Hindusthan | Rights | 2,000 | 2-May-11 |
| Religare Enterprises | Rights | 800 | 28-Apr-11 |
| State Bank of India | PCR | 20,000 | 27-Apr-11 |
| Fame India | Rights | 90 | 20-Apr-11 |
| Neo Corp International | PCR | 450 | 13-Apr-11 |
| Sri Arumuga Enterprise | Rights | 100 | 18-Feb-11 |
| Exelon Infrastructure | PCR | 120 | 10-Feb-11 |
| Rainbow Foundations | Rights | 50 | 28-Jan-11 |
| PCR is Public-cum-rights Source: Prime Database As per announcements since January 1, 2011 | |||
Since January 1, as many as 52 companies have announced their intention of raising funds via a rights issue, while only 40 companies have announced plans to raise funds through QIP, according to research firm Prime Database.
Among some renowned names, Bajaj Hindusthan is mulling a Rs 2,000-crore rights issue and Religare Enterprise has received board approval for an Rs 800 crore one. The biggest issue will be from the country’s largest lender, State Bank of India, which intends to raise Rs 20,000 crore through a public-cum-rights issue. The bank’s previous rights issue was in 2008, when it raised Rs 16,736 crore.
RIGHTS VERSUS QIP
Apart from the change in investor sentiment, the rights issue route is gaining popularity because promoters get the flexibility to set the issue price. They do not have to adhere to any regulator-formula on pricing. The other reason is that existing shareholders get to retain their shareholding (stake) in the company. However, the issue price is generally set at a steep discount to the market price, leading to higher dilution of equity capital.
Ambareesh Baliga, COO of Way2Wealth, said, “Promoters are entitled to the rights issue along with other shareholders and the promoter holding does not come down, while there is dilution of promoter shareholding if they chose the QIP route.”
If there is under-subscription in a rights issue, the shortfall is generally subscribed by the promoters and they are exempted from the five per cent annual limit of the Securities and Exchange Board of India’s creeping acquisition guidelines, said Jyoti Prasad, head of investment banking from Asit C Mehta Investment Intermediates.
QIPs, in vogue last year, are not attractive this year because the institutional appetite has waned due to lacklustre performance of stocks. In the past, too, QIP issuances have slipped when market sentiment was not positive, 2008-09 being a clear example. In 2010, the markets moved up 17 per cent, while this year the markets are down 10 per cent year to date. However, QIP is a speedy method of raising funds, whereby equity shares or convertible instruments are allotted to institutional investors.
The pricing of the issue is more stringent in the QIP scheme, which may be proving to be a deterrent in current market conditions.
SHOULD YOU SUBSCRIBE?
Analysts recommend retail investors subscribe to rights issues only if it is at a steep discount to the market price. They recommend investors to stay away from companies that are over-raising funds, highly leveraged and in cases where there is little clarity on earnings growth. Also, if the stock price has moved up very sharply just a few weeks before the rights issue, investors should avoid subscription.
What they need to note is that the company’s EPS (earnings per share) is mostly likely to decline in the immediate term due to issue of fresh shares (due to the rights issue). But if the company is able to effectively deploy the proceeds in productive activities, it should yield better earnings and, hence, returns for shareholders in the longer run.
