Mumbai: Rights issues, or the sale of stock to existing shareholders, are making a comeback as a preferred fund-raising route for listed companies, opening up the opportunity for retail investors to increase the size of their holdings.
With institutional money no longer cheap and as easy to come by as it was six months ago, many companies are tapping shareholders.
At least eight companies, including Adani Enterprises Ltd and Uttam Sugar Mills Ltd, have received approval from the capital market regulator, the Securities and Exchange Board of India (Sebi), to raise a collective Rs2,400 crore through rights issues.
Currently, six companies, including IBN18 Broadcast Ltd and Swaraj Mazda Ltd, are in the market raising around Rs700 crore. Three other large companies have announced plans to raise money through the route and many more are expected to join them, market intermediaries say.
Consumer durables maker Videocon Industries Ltd said last week that it would raise Rs1,200 crore. It has filed a draft offer document with the market regulator.
Earlier, India’s second biggest airline Kingfisher Airlines Ltd and biggest phone company Bharti Airtel Ltd had taken board approvals to raise money through rights issues. State Bank of India chairman O.P. Bhatt has also spoken of raising money through a rights issue although the bank has not yet sought Sebi approval.
A rights issue offers existing shareholders the right to buy a proportional number of additional securities at a given price—usually at a discount—within a fixed period. Companies take the rights issue route for raising capital when equity markets are relatively stable and promoters seek to raise money without diluting their stake.
This is because in a falling market, investors prefer to buy shares from the secondary market. According to investment bankers, companies prefer to take the rights issue route to raise funds when they find it difficult to attract enough institutional investors to fund their working capital requirements.
“Typically, when it’s difficult to raise money from institutional investors, companies float rights issues. That is what’s happening now. Investors are more confident about putting (money) in rights issues as promoters also bring in money and provide equal opportunity of buying shares for all categories of shareholders,” said Naresh Kothari, president, Edelweiss Capital Ltd.
Some companies are taking advantage of stable markets to raise capital from existing shareholders without having to offload shares from promoters’ holdings, said Prithvi Haldea, chairman and managing director of Prime Database, a Delhi-based primary market tracker.
Rights issue had taken a back seat last year as companies preferred the quick and convenient route of qualified institutional placements (QIPs). From a peak of Rs29,786 crore in 2008, money raised through rights offerings fell by over 90% to Rs2,525 crore in 2009.
According to V.R. Srinivasan, director, Brics Securities Ltd, a Mumbai-based brokerage, rights issues are attractive to small investors as they are usually at a discount to market price. QIPs, on the other hand, have a floor price that investors cannot breach.
Cash-strapped Indian firms chose to raise money through QIPs last year. Unitech Ltd, India’s second largest real estate firm in terms of market value, took the lead to raise Rs1,621.1 crore in March last year and other firms, mostly in the realty sector, quickly followed suit to meet working capital needs. Overall, 48 QIPs raised Rs33,780.77 crore in 2009.
Unlike public offers, QIPs do not require any offer document or regulatory clearances, allowing firms to quickly raise funds. QIPs, in which promoters of listed entities issue shares to institutional buyers without involving retail investors, had suffered a setback in 2008, amid a global credit crisis. Funds raised through QIPs amounted to Rs3,586.45 crore in 2008, a drop of around 80% from Rs23,338 crore in 2007, according to Prime Database.
Early this month, the capital market regulator changed QIP norms and made it mandatory for firms to disclose the names of investors. They had been required to disclose the identities of only the underwriters of such issues.
Because all investors are not comfortable with the idea of their identities being disclosed, many more companies may opt for rights issues, according to brokerage houses.