The Securities and Exchange Board of India’s (Sebi) move to lift restrictions on insurance and mutual funds subscribing to preferential issues of companies has proved to be a boon for India Inc.
After the regulatory change in January 2012, fund mobilisation through preferential issues has risen sharply in the current calendar year with over Rs 23,000 crore being raised by over 100 Indian companies till date, as compared to Rs 18,500 crore in the entire calendar year 2011. Thirteen public-sector banks have raised Rs 7,157 crore by issuing shares to the Life Insurance Corporation of India through this route.
“The relaxation has benefited public sector banks, which have been able to raise Tier-I capital through the preferential route,” said Abhay Bhalerao, director, Equirus Capital. “As the market has been volatile this year, raising funds from portfolio investors has been challenging. Many companies have preferred the preferential route, where investors come in for the long term.”
The fear of poor shareholders’ response amid unfavourable market conditions, kept away most promoters from raising additional long-term funds from the secondary market.
A preferential allotment is done by issuing shares of a company to a select group of investors at a price not less than the average price of the past six weeks. This is a faster way for a company to raise equity capital.
Fast-moving consumer goods company, Marico, has raised Rs 500 crore through issue of shares to two foreign investors to fund acquisition of the personal care business of Paras from Reckitt Benckiser. Godrej Consumer Products, too, raised Rs 685 crore by selling 4.9 per cent stake to Baytree Investments, an arm of the Singapore-based investment firm Temasek, to fund acquisitions and reduce debt. Debt-ridden Future Group company, Pantaloon Retail (India), proposes to raise Rs 200 crore by issuing shares to Bennett, Coleman & Co, to reduce its debt.
“This means there are clear issues of liquidity. Corporate India, tired of fluctuation in the forex markets, is shying away from overseas debt. At the same time, liquidity with banks seems to be very poor. Thus, selling equity via the preferential route becomes a viable option,” said Kishore Ostwal, chairman and managing director of CNI Research.
On January 28, Sebi had decided to exempt insurance companies and mutual funds, which are broad-based investment vehicles representing the public at large, from regulations related to sale and lock-in of their pre-preferential shareholding in issuer companies.
According to earlier norms, these institutions were not allowed to participate in preferential allotments if they had sold holdings in the issuer firms in the preceding six months.
