Mumbai: Kumar Mangalam Birla, chairman of the Aditya Birla group, has decided not to convert preferential warrants worth Rs4,000 crore in the group’s fertilizers-to-financial services subsidiary, Aditya Birla Nuvo Ltd, after around a 60% drop in the stock since allotment, two group executives familiar with the development said.
The company now has to hunt for alternative sources of funds in a cash-starved market for expanding its business.
Choppy markets: A 60% drop in the stock has made converting warrants into equity unviable for Kumar Mangalam Birla. Bloomberg
Birla had decided to buy the preferential warrants for two reasons. The group’s five financial services businesses—especially life insurance—needed a large amount of capital to expand. He also wanted to raise his stake in Aditya Birla Nuvo to 49% from 42%.
Aditya Birla Nuvo had allotted 20.5 million preferential warrants to Birla in April 2008, at a conversion price of Rs1,997.45 a share with a face value of Rs10—to raise at least Rs4,000 crore. The warrants are due for conversion in September.
Birla initially paid Rs400 crore on subscribing to the warrants, in accordance with a regulatory requirement under which the warrant holder has to pay 10% of the issue’s worth upfront.
Aditya Birla Nuvo shares have lost at least 60% of their value since allotment. On Thursday, the shares closed at Rs511.75 on the Bombay Stock Exchange. The bourses were closed the next day on account of Good Friday.
A spokeswoman for the Aditya Birla group declined comment, but one of the two executives familiar with the matter said last week, “We have been communicated (information) that Birla will not subscribe to the remaining preferential warrants.”
The two executives head different businesses at the group and are members of the Aditya Birla Management Corp. Ltd, the group’s think tank that takes critical decisions in terms of investments, strategy, mergers and acquisitions.
“A lot of thinking has gone into this conversion of warrants and it does not make any sense to invest the balance amount at such a high price. Our chairman can buy shares from the market at a much lower price,” said the second executive on Thursday. “We are quite committed to put in fresh capital and will find a way out.”
According to the executives, the group is yet to finalize an alternative option for infusing fresh capital, but they indicated it could be a combination of debt and equity funding.
Ajay Srinivasan, managing director of the company’s financial services business, had told investors on 29 January that Birla Sun Life Insurance Co. Ltd’s profit in 2007-08 had surged to Rs445 crore from Rs139 crore the previous year, and needed Rs1,000 crore annually till 2010-11.
According to him, the company has quadrupled its branches and has 115,000 direct selling agents. On the warrants, he told Mint, “It’s for the promoters to decide on the preferential warrants.”
The company is seeking to raise some money by selling assets that are not central to its business.
The Economic Times reported on Friday that private equity fund 3i Group Plc. is the lone bidder for the group’s insulator business, Birla NGK Insulators Pvt. Ltd.
Equity warrants are used by promoters to raise their stake at a future date. A warrant is a security that entitles the holder to buy a company’s stock at a price that’s usually higher than the stock price at the time of issue. Companies issue warrants to enhance the future value of their stock to the people holding it.
The capital market regulator, Securities and Exchange Board of India, or Sebi, has allowed Indian companies and promoters to raise their stake in group firms by converting preferential warrants into shares. Warrant holders have to pay for 10% of the warrants upfront and the remaining in 18 months from the date of allotment.
In February, Sebi raised the upfront payment requirement to 25%.
This is not the first time that an Aditya Birla group company has decided against converting its preferential warrants.
IGH Holdings Pvt. Ltd, a privately held group company that owns 7.2% of India’s largest aluminium maker Hindalco Industries Ltd, said previously that it would not convert its eight million preferential warrants into equity at Rs146 a share, as the company had raised Rs5,047.7 crore in October at Rs96 a share. Kumar Mangalam Birla had subscribed to 50% of the unsold shares and the promoters raised their stake in the firm to 37% from 31.43% through the secondary offer.
In recent months, several other Indian companies and promoters have shunned preferential warrants as prices of shares have fallen below the conversion prices.
However, Mukesh Ambani, chairman of Reliance Industries Ltd, converted 120 million such warrants into equity shares in October, raising his stake in the country’s most valuable company to 51.87%.