Mumbai: A fortnight after raising Rs447.98 crore through a rights issue, Tata Investment Corp. Ltd has approached shareholders again, this time seeking their approval to make provisions for up to Rs135 crore for current and future “diminution in value of investments”.
The company has issued a notice calling for an extraordinary general meeting of shareholders on 2 December to make the provisions, following the slump in the stock markets.
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Tata Investment is part of the Tata group and has the mandate to invest in a diversified portfolio of quoted and unquoted securities, including equity shares, equity-linked securities, government securities and mutual funds.
“The provision for Rs100 crore is just an enabling move. We may not even require it, if the (stock) markets improve,” said a senior executive at Tata Investment, responding to a query from Mint. “We are seeking shareholder approval and, thereafter, high court approval in view of the accounting standard, which came into effect from 1 April 1995,” added the executive, who did not want to be named because he is not authorized to speak with the media.
According to Indian accounting standards, companies have to make a provision for diminution in value of investments that show a decline in value over a period of time.
Tata Investment has sought approval for two resolutions: For allocating Rs35 crore towards provisions, and another Rs100 crore if the stock market continues to languish, the executive said.
Promoters in Tata Investment, who had a collective 60.64% stake in the company as on 30 September, picked up shares from the rights issue in excess of their eligibility following poor response from minority shareholders. The group’s stake in the company is expected to rise to nearly 70% after conversion of the zero coupon convertible bonds in the rights issue, which closed on 16 October.
Tata Investment was likely to have used a “major part” of the proceeds from its rights issue to subscribe to the Tata Motors Ltd’s rights issue that closed four days later, said Aspi Bhesania, a long-term shareholder in both firms.
The Tata Investment executive, however, denied that the proceeds of the company’s rights issue were used for subscribing to Tata Motors’ issue, although the investment firm’s letter of offer mentions that it can invest in securities of “group” companies.
Tata Investment owned 1.54 million shares of Tata Motors as on 31 March.
The Tata Motors’ rights issue raised Rs4,145.80 crore through the simultaneous, but unlinked issues 64 million shares at Rs340 apiece and another 64 million shares at Rs305 apiece. On Monday, shares of Tata Motors closed at Rs140.45 each, up 2.56%, on the Bombay Stock Exchange.
Shares of Tata Investment ended Monday down 3.5% at Rs254.90 each, a fall of 68% from their 52-week high of Rs804.50 on 4 January. The shares have dropped nearly 27% since 27 September, the day the rights issue opened.
Tata Investment had offered through its rights issue zero coupon convertible bonds at Rs650 each, with one part convertible at Rs300 per share on 1 August 2009 and the other at Rs350.
Tata Investment has a reputation for being a prudent stock market investor. On 31 March, the book value of its total investments, including equity shares, was Rs889.19 crore, with a realizable value of Rs3,065.19 crore.
Since then, though, the stock markets have fallen, likely narrowing the difference between the market value and the book value, a possibility Tata Investment has admitted.
“With the downturn in the stock market, the market value of the portfolio has been declining,” the company said in a 5 November explanatory statement to shareholders.
This is not the first time Tata Investment is making a provision for a fall in value of investments. In September 2002, when the stock markets fell, the company had made provisions for Rs20 crore. The company used Rs19.99 crore from this allocation.
Tata Investment’s offer document for the rights issue had mentioned that it had neither identified any arrangements nor agreements to use the net proceeds.
The document indicated that Tata Investment may invest the proceeds in group companies, which could expose it to risks associated with investments in a single group of companies such as “market risks, credit risks”.
The company’s investments in the group at book value aggregated 40.92% of its total investments, the offer document showed.