Mumbai: Investors who had bought into a convertible share offer from Tata Steel Ltd face the prospect of significant losses unless shares of the world’s sixth largest steel maker stage a spectacular rally in the next two weeks. Group holding company Tata Sons Ltd and Tata Steel chairman Ratan Tata have also invested in these convertibles.
Tata Steel will convert six convertible cumulative preference shares, or CCPS, into one equity share of the company in September.
The conversion may see investors lose about one-fifth of the money they had invested at the height of the stock market boom in late December 2007 if Tata Steel shares remain at current levels.
The conversion price is Rs600, or six CCPS of Rs100 each, for every one Tata Steel share. On Friday, Tata Steel shares fell 0.16% to Rs469.75 each even as the Sensex, India’s benchmark equity index, lost 0.7% to close at 15,411.63 points.
Compulsory conversion: Tata Steel chairman Ratan Tata. Harikrishna Katragadda / Mint
At this price, investors in CCPS will lose 21.7% for every equity share post-conversion.
“We are going ahead with our plan to convert CCPS into equity shares,” an official from the investor relations cell of Tata Steel said. The company has already informed stock exchanges with the conversion plan, according to the official. The executive, who is not the official spokesperson of the company, declined to be identified.
The rights share-cum-CCPS, an innovative financial instrument, were allotted on 18 January 2008, when the Sensex was at 19,013.70 and Tata Steel was quoting at Rs781.90 per share. The company raised Rs5,472.66 crore through the rights and CCPS issues.
According to the terms of the issue, six CCPS of Rs100 each are compulsorily and automatically convertible on 1 September into one ordinary share of Rs10 each at a premium of Rs590 per share. The rights issue in the ratio 1:5—that is one equity share for every five held—at a price of Rs300 per share had raised Rs3,655 crore.
Till CCPS are converted into equity shares, the investors will earn 2% interest on their holdings.
To be sure, the investors could have avoided the loss had they sold CCPS in the secondary market. CCPS are listed on stock exchanges. Since their listing in January 2008, the price of CCPS peaked at Rs142 and dropped to as low as Rs30 per CCPS.
This means the investors could have made money had they chosen to sell when the instruments were trading at their peak. Similarly, those who bought at Rs30 will make money when their CCPS will get converted into shares.
There was also an arbitrage opportunity, pointed out Arun Kejriwal of Kejriwal Research and Investment Services, a Mumbai-based investor consulting firm. CCPS were always available at a discount to Tata Steel shares in the stock exchanges and many savvy investors sold their Tata Steel shares and bought CCPS that eventually will be converted into equity shares, he said.
If the Tata Steel share price continues to quote below Rs600, it will be a “notional loss for the CCPS investor”, said Dinesh Lakhani, who has been a Tata Steel shareholder for at least two decades. Since it is a compulsory conversion, the investors “have no choice” and will have to “wait and watch” for the sentiment to improve, Lakhani said. On his part, Lakhani will hold on to the shares post-conversion, as he is a long-term investor.
This will be a rare recent example when the minority shareholders may have to bear the pain of such an investment commitment made at the height of the stock market boom.
In the recent past, promoters of quite a few companies have borne the brunt of a falling market. The promoters of Reliance Infrastructure Ltd, Aditya Birla Nuvo Ltd, Tata Power Ltd and a few others have not opted for conversion of preferential warrants as the current market prices of shares are lower than the price at which the warrants were to be converted. By not opting for conversion, they had to forfeit 10% of the price they deposited at the time of the preferential allotment.
From February, the capital market regulator has raised the deposit amount to 25% of the proposed fund infusion at the time of warrant allotment. The promoters are required to pay the remaining at the time of conversion or forfeit the initial investment if they choose not to exercise the option.
Ratan Tata holds 21,709 CCPS, as per the 2008-09 annual report of the firm.
Tata Sons was allotted 31.36% of CCPS. Tata Motors Ltd, another group company which holds a stake in Tata Steel, was allotted 4.38% of the CCPS issue. Metal stocks such as Tata Steel, JSW Steel Ltd and Steel Authority of India Ltd have risen sharply in the past few weeks as the markets expect steel prices to strengthen further.