Vested Interest: Calling on all stakeholders

Vested Interest: Calling on all stakeholders

Retail investors who fear buying stocks in this expensive market, should make use of the series of upcoming rights issues to increase investment in stocks that they own, analysts say. According to New Delhi-based primary market tracker Prime Database, as many as five rights issues are to be released shortly. These include the ones floated by Tata Steel, for Rs9,654 crore, Indian Hotels Co. Ltd, another Tata group concern, which plans to raise approximately Rs2,200-2,300 crore through two simultaneous rights issues, Federal-Mogul Goetze (India) Ltd for Rs110 crore, DIC India Ltd for Rs46 crore, ITD Cementation India Ltd for Rs250 crore and RT Exports Ltd for Rs28.5 crore.

According to analysts, the rights issues, which are priced at a significant discount compared with the current market price of the stock, will be a good opportunity for retail investors to put fresh money in the market.

What is a rights issue?

A rights issue is like a follow-on public issue, but the difference here is that the shares floated are exclusively for existing investors of the company. An individual shareholder, who is entitled to buy shares in a company when a rights issue is floated, has the option to accept the offer fully, partially, or even reject it to buy more stake. In most cases, these shares are transferable, which means that the allottee is free to sell them in the open market.

“Rights issues are a way to reward the shareholders of a company, while also raising capital for its future business," says Ketan Karani, head of equity research at Kotak Securities Ltd. “It is the ideal way to raise short-term capital. Historically, most rights issues have provided ample returns to the investors, except for a few stray cases." Karani adds that these issues could be a great opportunity for retail investors to accumulate stocks in an upwardly mobile stock market.

“When the rights are not fully subscribed by some individuals, these shares can be bought by other shareholders who have oversubscribed," Karani says. “There is a possibility of the promoter upping stake in the business in such cases," he adds, noting the case of Indian Hotels, where the Tata group has announced plans to increase its shareholding.

“However," says Karani, “if a promoter wants to increase his stake in a business, he can always do it by a preferential allotment of equity or through creeping acquisitions (buying from the free-float) in the open market."

Rights issues are a secondary market offering to raise capital. A rights issue is allocated on the basis of a ratio and can also be underwritten, which ensures a form of guarantee that the capital requirement of a firm will be met.

What’s your benefit?

“These issues help the promoters maintain their stake in the company at current levels, if not increase it post conclusion of rights issues," says Amol Rao, research analyst, Financial Securities Ltd, a Mumbai-based brokerage. In the case of Indian hotels, “by leveraging fresh equity, the company can pursue potential strategic expansion plans such as the purchase of controlling stake in Orient-Express Hotels Trains & Cruises, (in which it bought a 10% stake for $211million) or buy foreign properties", Rao adds.

“Rights issues are a boon to retail investors," says Lalit Thakkar, director and head of equity at Mumbai’s Angel Securities Ltd. “On one hand, it shows the company’s confidence in its own business, while it also demonstrates the firm’s strategy for its own investors."

Thakkar adds that a rights issue is a double bonanza for the investor if the return on capital employed is also taken into account. “Firstly, the shares are sold at a heavy discount to market price," he says. “Secondly, the money raised is invested in the business, which further increases the value of the shares the investors have bought."

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