Mumbai: Finance firm JM Financial Ltd will underwrite a little over a fourth of the rights issue of the country’s largest truck and bus maker Tata Motors Ltd which is raising Rs4,147 crore to fund its acquisition of Jaguar and Land Rover by selling shares to existing shareholders.
At least two people familiar with the development who did not wish to be named, including a banker, said the Nimesh Kampani-promoted JM Financial will underwrite Rs1,200 crore to ensure that Tata Motors raises the entire amount.
C. Ramakrishnan, the chief financial officer of Tata Motors, said, “We will not be able to offer any comments now. Once the regulatory formalities are completed, we will be able to share the details.”
RIGHTS ANNOUNCEMENTS (Graphic)
Executives at JM Financial could not be reached for comment Friday evening.
By underwriting an issue, bankers guarantee that the funds sought by the company will be raised, as they will subscribe to any shares not taken by the shareholders.
Last month, five bankers agreed to underwrite all of Hindalco Industries Ltd’s$1.2 billion rights issue.
In this case, JM Financial is underwriting just part of the issue. Mintcouldn’t immediately ascertain whether other bankers would underwrite the rest of the issue. It’s rare for all of a rights issue to be underwritten by bankers. Normally, the promoter group picks up the unsubscribed portion of a rights issue so it can raise its stake in the company.
Tata Motors announced on 2 September that it would issue fresh shares in two tranches, starting the end of September this year, to raise money to repay part of a loan taken from a syndicate of banks to purchase the Jaguar and Land Rover businesses from Ford Motor Co. for $2.3 billion (Rs10,212 crore now).
Tata Motors has guaranteed the loans taken by its wholly owned subsidiary TML Holdings Pte. Ltd, Singapore which bought Jaguar and Land Rover.
Tata Motors, part of the Tata group of companies, will issue one ordinary share for every six owned by shareholders at Rs340 (face value of Rs10) to raise Rs2,186 crore. The company will also issue another set of so-called A shares, in the same ratio (one for every six shares held) at Rs305 a share (face value: Rs10) to raise Rs1,961 crore. A shareholder who subscribes to “A” shares will have differential rights with regard to voting and dividend.
The shareholder will be entitled to one vote for every 10 “A” shares held but will get 5 percentage points more dividend than that declared, on each of these shares. On Friday, the company informed stock exchanges that the cut off date to issue shares has been fixed as 16 September. All those recognized as shareholders on the books of Tata Motors on that date will be entitled to subscribe to the rights issue.
In a rights issue, promoters, banks and financial institutions subscribe to the issue as they get a chance to buy shares at a discount. Shares of Tata Motors closed at Rs419.95 each Friday on the Bombay Stock Exchange, down 2% on a day when the exchange’s benchmark index fell 2.8% to 14,483.83.
Underwriting is generally a guarantee or safe-guard that ensures that the company raises the money even if individual shareholders choose not to participate in the offer. Such individual or retail shareholders own 11.9% of Tata Motors. Domestic banks and Indian financial institutions 17.5%, Foreign institutional investors, or FIIs, non-resident Indians, or NRIs, and overseas corporate bodies are together the largest shareholder group with a 37.2% stake. The promoter, Tata group, owns 33.4% of the company.
Ratan Tata, chairman of Tata Motors, told the company’s shareholders at its 63 annual shareholders meet on 24 July, that apart from rights issues, the company was also planning to raise money through a global sale of shares.
The company had to abandon an earlier plan to raise money that involved issuing equity and equity-linked instruments worth Rs9,800 crore. The company had said this would dilute its equity base by up to 35% in the current fiscal year and another 12% in three to five years, adding up to 51%.
“This was when Tata Motors’ stock traded at Rs635. Ahead of the company’s review meeting on Wednesday, the stock had fallen by a third to Rs425. Mint’s calculations show that if the company had stuck to its original plan, the equity dilution would have been as high 77% in three to five years, with the majority equity issuance happening in the current fiscal year.
An auto analyst with a foreign brokerage firm said it was this prospect of a very high dilution that led to the sharp fall in Tata Motors’ shares. The company’s announcement of the large equity issue in May has worked as a double-edged sword,” Mint’s Mark to Market column on 22 August said.
At the shareholder meet on 24 July, Ratan Tata also said that the company should consider an equity dilution of 50% after its domestic and international share sale.
Vaishali Jajoo, an analyst with Angel Stock Broking which downgraded Tata Motors to “neutral” from “buy“ after the Jaguar and Land Rover deal, said in a report that the company would continue to face cash-flow pressures going ahead on account of long-term capital investment plans on the domestic front and ambitions of becoming a global automobile maker.
The report, released after the company announced its rights issue, said the Rs35,413 crore (by revenue) company’s net profit could fall to Rs1,921 crore in 2008-09, but recover to Rs2,116 crore in 2009-10.
Tata Motors ended 2007-08 fiscal year with Rs2,053 crore in net profit.