Mumbai: On 23 May, a few minority shareholders of the Rs600 crore Spanco Ltd, a back-office services and telecom solutions company, in a rare show of unity, voiced their dissent against a preferential warrant offer to promoters and institutions. According to them, the preferential warrants were priced way below the prevailing market price of the company’s shares.
The trend of preferential warrants, however, is catching on. Triggered by a runaway rise in share prices, since 18 May, many companies are approaching their shareholders, seeking approval for preferential offers in favour of promoters. Some of them are even including a select band of institutional investors for preferential issues. Such offers are used to raise stakes in the company at a future date at a pre-fixed price.
Only, with the markets having recovered spectacularly since March, such offers look underpriced.
Firms going for preferential issues to promoters, select institutional investors. Ahmed Raza Khan / Mint
In Spanco’s case, two minority shareholders—Dinesh Lakhani and Aspi Bhesania—opposed the pricing of the warrants that had got the board approval on 23 April, much before the 2,000-point jump in the Sensex, the country’s benchmark equity index, on 18 May when markets celebrated the return of Congress-led United Progressive Alliance government at the Centre.
Many of the preferential warrants are priced at a steep discount to the prevailing market prices. Going by the capital market regulator’s formula, preferential offers need to be priced at the average of the six-monthly high and low or the average of the two-week high and low, whichever is higher.
The Sensex dropped to its 40-month low of 8,160.40 in the first week of March. Since then, it has risen 83.92% and closed at 15,008.68 on Thursday. Including the 17% rise on 18 May, the Sensex has risen at least 23% in the past three weeks. This means those firms that have got the board approval in April or the first half of May can get such preferential offers cheap.
After the general election and the formation of the new government, some stocks have gained 60% or even more. Among them are real estate developer Unitech Ltd, infrastructure companies such as Reliance Infrastructure Ltd and Gammon India Ltd, and edible oil maker Ruchi Soya Industries Ltd.
All these firms and many others, including Jindal Saw Ltd, are approaching shareholders, seeking their nod for preferential allotments to promoters.
Dinesh Shahra, managing director of Ruchi Soya, was not available for comment as he was travelling abroad. R.L. Gupta, company secretary and compliance officer at Ruchi Soya, said: “These funds were required for the long-term, and preferential issue is a management decision.”
The directors of Gammon India were also travelling and not available for comment. Gita Bade, company secretary and compliance officer at the company, said: “The promoter is pumping in the funds in accordance of the Sebi (Securities and Exchange Board of India) norms.”
After the conversion of preferential warrants, Gammon’s promoters will hike their stake by nearly 10 percentage points—from 31.11% to 41.76%. And so will Ruchi Soya.
Unitech and Jindal Saw will see the promoter’s stake increase by a little less than 5 percentage points.
Yet another lot of companies are in the process of giving themselves blanket approvals for preferential offers to institutional investors, including their promoters. Sobha Developers Ltd, Lanco Infratech Ltd, Dhanus Technologies Ltd and a few others belong to this group.
The surge in preferential offers, according to a few analysts in brokerages, could be an attempt by promoters to benefit from low share prices.
At the Spanco meet, Lakhani who owns 100,000 shares along with his wife and daughter, proposed an impromptu amendment to the preferential offer resolution, by arguing with the Spanco board to hike the price from Rs35 to Rs50. On Thursday when Mint contacted Lakhani, he confirmed the development, saying, “I am dead against preferential offers to a certain class of shareholders.”
“I told them (the board) that these (foreign institutional investors or FIIs) are fair weather friends.” FIIs had about a year ago decided to forego Spanco’s preferential offer after committing to buy warrants at Rs210 per share.
While FIIs decided not to honour their commitment to convert preferential warrants to equities in Spanco, in a few other firms promoters have done so.
Under the current regulatory norms, the promoters are required to pay 25% of the proposed fund infusion at the time of warrant allotment. Till January this year, they were required to pay 10%. The promoters either pay the remaining at the time of conversion or forfeit the initial investment if they choose not to exercise the option.
Lakhani, who moved an amendment to the resolution, said the board discussed the minority shareholders’ concerns on the spot with a representative of ChrysCapital Investment Advisors, India, one of the largest home-grown private equity funds that holds close to 15% in the company, and revised the offer price to Rs40 per share.
Grabbing opportunity: Unitech Ltd’s corporate office in Gurgaon. Unitech is among the companies that have approached shareholders seeking their approval for preferential allotment to the promoters. Ramesh Pathania/Mint
Prem Iyer, Spanco’s company secretary, confirmed that the firm had indeed revised the offer price. While agreeing that such instances are rare, he pointed out that the resolutions are worded in such a way that modifications are possible at the shareholders’ meetings.
Shareholders such as Lakhani, Bhesania and others want equal opportunity for minority shareholders, by way of rights issues that do not differentiate between different sets of shareholders when it comes of allotment of shares.
However, it takes time to allot the rights issues. Under a secondary market offering, a company can opt for a rights issue to raise capital. With the issued rights, existing shareholders have the privilege to buy a specified number of new shares from the company at a specified price within a specified time.
“The recent action of some of the promoters to allot warrants appears to be opportunistic, but unfortunately nothing can be done about it,” said Nitin Potdar, partner at J Sagar Associates, a Mumbai-based leading corporate law firm.
According to him, in past there have been instances where promoters allowed the warrants to lapse because the market price went down. “The rules for preferential allotment have undergone several changes and any more change would unnecessarily complicate it further,” he said.
Potdar prefers easing norms for rights issues. “Instead of making preferential allotment difficult for promoters, Sebi should come up with a simpler and quicker process for rights issues that would benefit all shareholders.” In March, Sebi had relaxed some of the norms for rights issues, making the process faster for companies.