Mumbai: The promoters of India’s second largest utility, Reliance Infrastructure Ltd (R-Infra), are unlikely to convert their preferential share warrants into equity as the company’s stock price is hovering at about half the conversion price.
However, unlike other promoters who have let their warrants expire or are expected to, an independent corporate action over the past one year has ensured that promoters’ stake in R-Infra has swelled by at least 9% at a much lower cost.
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Anil Ambani and associates, the promoters of R-Infra, have an option to convert 43 million warrants into equity till 19 July this year at Rs1,822 a share—significantly higher than current levels.
R-Infra’s shares closed at Rs1,095.10 on Wednesday on the Bombay Stock Exchange.
“The promoter warrants are unlikely to be converted,” said a senior Reliance-Anil Dhirubhai Ambani Group (R-Adag) official, adding that “the increase in promoters’ stake has already happened because of our buy-back rounds” and that “objective has been achieved”.
Equity warrants are used by promoters to raise their stake in the company at a future date at a pre-fixed price.
When converted, these serve the twin purpose of raising promoters’ stake besides infusing funds into the company. Since February, the regulatory norms were changed and promoters are required to pay 25% of the proposed fund infusion at the time of warrant allotment. When R-Infra promoters were allotted the warrants, 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.
A questionnaire emailed to R-Infra spokesmen on Tuesday afternoon remained unanswered till late Wednesday evening.
Two rounds of share buy-backs between March 2008 and April 2009 from the market have rendered warrant conversion virtually meaningless from the promoters’ view point.
Normally buy-backs are conducted to prop the share price and boost investor sentiment.
As the shares bought by R-Infra through the buy-backs were extinguished, it led to a reduction in R-Infra’s share capital. Consequently, the proportion of promoter group’s holding in the company rose.
A review of shareholding pattern on Bombay Stock Exchange’s website shows a jump of 9.11 percentage points in the stake held by Anil Ambani and associates in past six quarters, from 34.68% in December 2007 to 43.79% in March.
A 21 January 2008 media statement by the group, announcing the R-Infra warrant allocation to Anil Ambani and associates, had stated that the warrants would increase the promoters’ equity stake to 44.4% from current 34.7%, expecting a rise of 9.7 percentage points.
Following the buy-back programme, the promoters’ holding is now veering close to that level.
Equity analysts covering the firm don’t seem too pleased with it. “It will be a negative sentiment for the stock if the warrants are not converted. This will imply the fund infusion that was expected will not come in and this could impact margins and force the company to raise more debt for financing its projects,” said Mohit Kansal, Mumbai-based sector analyst in the domestic brokerage, KR Choksey Shares and Securities Pvt. Ltd.
The R-Adag senior executive said that cash and cash equivalents of over Rs10,000 crore in R-Infra’s books at the end of 2008-09 could take care of all financing requirements.
The 9.11% increase in stake has come rather cheap for R-Infra’s promoters.
Parag Gupta and Saumya Srivastav, analysts with Morgan Stanley Research, in a 5 May note said that R-Infra has bought back 11.26 million shares for Rs920 crore, in both rounds of buy-backs.
Share warrant conversion would have required a Rs7,835 crore investment from the promoters of which only 10% has been paid till now.
Even if they forfeit the Rs783.5 crore to the company, it would still mean the stake rise has not cost the promoters much.
But the company may take the hit even as promoters gain, pointed out another sector analyst in a foreign brokerage who did not want to be quoted. “The promoters may not have intended this but the fact remains that the company has not only funded the buy-backs but also stood to lose out on bulk of the proposed fund infusion.”
R-Infra promoters will not be alone in foregoing their warrant conversion if they so choose. Mint on 15 April had reported that the promoters of Aditya Birla Nuvo Ltd, Usha Martin Ltd, Monnet Ispat Ltd, Nagarjuna Fertilizers and Chemicals Ltd, among others, had decided not to convert the warrants.