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One out of every three rights issues trading below offer price

One out of every three rights issues trading below offer price
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First Published: Tue, May 27 2008. 11 06 PM IST

Updated: Wed, May 28 2008. 01 22 PM IST
Mumbai: In January, when India’s largest lender State Bank of India (SBI) announced an employee share purchase scheme after securing approval for this from its owner—the government—and stock market regulator Securities and Exchange Board of India, employees rushed to avail the offer, the first in the bank’s 200-year history.
The around 200,000 employees that bought shares under the scheme are likely regretting it now.
That’s because the bank’s shares now trade at a 7.34% discount to the price at which they were offered. This price was the same as that of the bank’s rights issue.
The case of SBI is not unique—although it is one of the few cases that involves a share sale to employees—and the stock of one out of every three companies that came out with a rights issues in the past one year is trading below its rights issue price.
In the past one year, 26 firms have floated rights issues; stocks of eight of them have offered negative returns on the issue price, which is normally fixed at a discount to the prevailing market price. And 15 stocks have returned more than the benchmark index of the Bombay Stock Exchange, the Sensex, which has gained 13.04% in the past one year.
When a firm floats a rights issue, its existing shareholders are offered stocks in proportion to the number of shares they already hold, normally at a discount, within a fixed period. Through such issues, firms raise their capital base and, at the same time, reward their existing shareholders.
Among the companies that made rights issues, the stock of Federal Mogul Goetze (India) Ltd is at the bottom of the list in terms of returns, with a negative return of 53.94%. The stock closed at Rs73.70 on Tuesday, against the rights issue price of Rs160 per share.
The stocks of seven other companies offered negative returns of between 5.67% and 53.94%. The list includes UB Engineering Ltd, Federal Bank Ltd and SBI.
SBI’s rights issue was floated to raise more than Rs16,000 crore to prop up its capital base and take care of the increasing appetite of Indian companies for credit. The scheme opened on 28 March and closed on 15 April after the rights issue closed.
The rights issue price of Rs1,590, was at least a 30% discount to SBI’s then market price of Rs2,277.99 per share. The bank’s employees were initially demanding such shares at Rs1,200, but even at Rs1,590 it was not a bad deal, considering the fact that SBI’s stock had hit its all-time high of Rs2,396.54 in mid-January. Under the scheme, the bank’s chairman was entitled to buy the maximum number of shares—1,000—and the managing director, 700. The entitlement progressively came down and at the lowest level, employees were offered 50 shares each. Overall, the bank offered 86.18 million equity shares translating into an 8.19% stake.
SBI’s employee share purchase scheme does not have any lock-in period. This means employees can sell the shares when they want to.
However, the stock hasn’t risen. At Rs1,473.30, SBI’s stock price is now trading at a 7.34% discount to its rights price as well as the price at which it had offered shares to its employees.
At the other extreme of the performance spectrum is Khaitan Weaving Mills Ltd. Its stock has been the biggest gainer, offering 1,233% returns to its investors. The company’s rights issue in December 2007 was priced at Rs10 per share. On Tuesday, the stock closed at Rs133.30.
GTL Infrastructure Ltd has offered a return of 410.5%. And the stocks of four other companies that made rights issues in the past year have offered at least 100% return to the investors. They are Bodal Chemicals Ltd (220%), Orbit Exports Ltd (201%), Tata Steel Ltd (189.32%) and Exide Industries Ltd (149.11%).
Follow-on offers
Three out of the five companies that came out with follow-on public offers in the past one year are also trading below their follow-on price. The companies involved are Manjushree Extrusions Ltd, Dagger Forst Tools Ltd and ICICI Bank Ltd.
India’s largest private sector lender, ICICI Bank made a follow-on equity offer in June 2007 at Rs940 a share, but the retail investors were given Rs50 discount for every share. The ICICI Bank stock closed at Rs812.55 on Tuesday.
A follow-on public offer is an offering of additional shares after a company has had an initial public offering.
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First Published: Tue, May 27 2008. 11 06 PM IST