Tight liquidity, time lag deter companies from taking the plunge.
Over the last few months, the Securities and Exchange Board of India (Sebi) has been introducing a slew of measures to make the process of rights issues more attractive for companies.
Among other things, the market regulator reduced last year the timeline for a rights issue from 109 days to 43 days.
Recently, it also introduced a discussion paper on its website, inviting comments for further relaxation in terms of the paperwork required for such issues. The proposals include non-disclosure of the company’s business details, and the basis of the issue price, floor price and price band.
However, companies aren’t too enthusiastic. According to data available on Sebi's website, four corporate houses – Suzlon Energy, JP Associates, Alok Industries and Fortis Healthcare – which had announced their plans for rights issues in the October-December period, are yet to take the process forward.
Market players said Sebi’s measures would have negligible impact due to the tight liquidity conditions and a lack of confidence among companies.
The failure of two mega rights issues in October has added to the nervousness.
The Rs 5,000-crore Hindalco rights issue was priced at Rs 96 per share. But on the day the issue opened, the stock traded at Rs 65. The issue devolved on the underwriters as it was hugely undersubscribed.
Similarly, the Rs 4,145-crore Tata Motors' issue also devolved on its merchant bankers after share prices fell to Rs 243.90 – way below the offer price of Rs 340.
“One of the key issues, which acted as a hurdle for further rights issues, was the pricing flexibility for companies,” said Gautam Gupte, director, Ambit Corporate Finance.
Though the Sebi measures have considerably lowered the risks involved in pricing and the actual issue timing, firms may still hesitate to launch rights issues as the time gap between price-fixation and the last date of application could be long enough for stock prices to slip further. This discourages companies from diluting their stake at discounted prices. One way out of this could be reducing the timeline further.
“Any further reduction in the timeline between fixing the price and opening the issue would make rights issues more attractive,” said Dharmesh Mehta, head (equities), Enam Securities.
| REGULATOR PROPOSES, MARKET DISPOSES |
| SEBI MOVES /PROPOSALS |
| * Timeline reduced from 109 days to 42 days |
| * Red tape on disclosure to be cut; no disclosure of company’s business required |
| * No need to declare the basis of issue price and price band |
| WHAT MORE IS NEEDED |
| * Further reduction of timeline |
| * Allowing shareholders to renounce rights online |
| *Better distribution processes |
| Recent rights issues that devolved |
| TATA MOTORS |
| Issue size: Rs 4,145 crore |
| Issue price: Rs 340 per share |
| Share price on issue day: Rs 243.90 |
| HINDALCO |
| Issue size: Rs 5,000 crore |
| Issue price: Rs 96 per share |
| Share price on issue day: Rs 65 |
Also, if investors are allowed to renounce their rights online, it would make these issues more investor-friendly. At present, an existing shareholder can renounce his right to exercise the option, but it is not known to other investors. By making an online declaration, more investors could enter the fray, in addition to the existing shareholder. A proposal to this effect is pending with Sebi.
Additionally, the recent proposals, if implemented, would mean lower costs in terms of paper, printing and distribution costs – a fact the market regulator had pointed out while posting the discussion paper.
Asim Dhru, CEO, HDFC Securities, takes this as a sign of Sebi's intentions to make the process simpler and faster. However, he sees further challenges, in terms of pricing, and distributing the issue.
