Companies bet on rights issues despite market slowdown

27 Oct, 2008, 1203 hrs IST,Reeba Zachariah, TNN

MUMBAI: Poor investor response notwithstanding, a host of companies are lining up rights issues. From
January till date, 21 companies have raised capital through rights issues, and according to industry
estimates, 12 more are in the pipeline.

While Tata group’s three companies - Indian Hotels Company, Tata Investment Corporation and Tata
Motors - failed to excite institutional and retail investors and left it to promoters to bail them out, another
Tata company Tayo Rolls will shortly hit the market with its rights issue. So what makes companies
increasingly opt for rights issue?
Says Nexgen Capital’s equity head Jagannadham Thunuguntla, ‘‘Companies that are stuck in the midst
of expansion and are in great need of funds, don’t have too many options.

In a market where pessimism is gripping the investor sentiment, companies’ managements feel that it is
better to tap existing investors to raise funds rather than look at new investors via various instruments like
initial public offers, private placement and so on).’’
In a volatile market other equity fund raising options such as initial public offer, follow-on public offer or
qualified institutional placement have seen a drop this year as compared to the previous year. With the
global financial crisis making investors increasingly cautious towards these equity products , for
companies, the last resort seems to be a rights issue . A rights issue is offered to a company’s existing
shareholders to purchase additional shares at a discounted price and if rejected, it can be transferred.

In a rights offer, a large portion of the issue is supported or underwritten by the promoter. Also in a rights
issue , there are no conditions to be met in terms of subscription levels as compared to an IPO. For a
public offer to be successful, it has to receive a minimum subscription of 90%.

‘‘ This helps promoters who chip in the extra amount and accordingly increase their holding in
companies. Plus, it is exempt from Sebi’s takeover guidelines,’’ says Mehul Savla of RippleWave Equity.
A promoter can raise their holding either through a preferential offer or a creeping route.

However, this is capped at 5% in a year. Also as compared to preferential allotment , there is no specified
pricing formula for a rights issue, which works in favour of promoters, Savla added.

India Inc, according to Thomson Reuters, has raised $6,854 million through rights issues from January till
date in this year, which is marginally more than the total amount of $6,506 million raised through IPO,
FPO and QIP deals.

Other companies planning rights issues are Jaiprakash Associates ($365 million), Suzlon , Dish TV,
Federal Mogul Goetze and Gujarat NRE Coke. Gujarat NRE Coke, similar to Tata Motors, is considering
rights issue with differential voting rights.

Differential voting rights carry lower voting right with higher dividend as compared to vanilla-type of
rights issue.