With Fx doors shutting, more & more firms take the rights turn

22 firms are mopping up over Rs 6,000 crore, the most in 11 years

MUMBAI: Since August 7, the day the RBI imposed restrictions on external commercial borrowings (ECBs), seven companies have announced plans to raise money through rights issues, including Swaraj Mazda, Exide Industries and Indian Hotels, to fund expansion.

The RBI move on ECB left companies with fund-raising options such as domestic debt, equity/warrant placements or the traditional rights offer.

While raising debt is not cheap currently - even for a company that is not highly leveraged, issuing shares to entities other than existing shareholders could mean dilution in promoter holding. But it is the third option - a rights issue - that is emerging as a trend. As many as 22 companies have announced plans to raise over Rs 6,000 crore - the highest mop-up of this kind in 11 years.

"Typically, in a bull market condition, it is easier to raise money through the equity route, especially if the dilution is not too large compared with the expected growth in topline and bottomline. Garnering money through rights is easier," said Deepak Jasani, head of retail research, HDFC Securities.

Route is also a function of the promoters' perspective.

"If the promoter is not willing to put in the money, then borrowing is the best way. And if borrowing is the way out, then ECB is the preferred route because of low rates and expected continuing appreciation of the rupee," said Jasani.

But the better option would be foreign currency convertible bonds (FCCBs). "FCCB offers the best of both worlds (higher premium and low rates), unless the company is faced with a rough patch. But, that's if the promoters are comfortable with some dilution in their existing holdings."

A rights offer, however, is a costly affair for the company, since shares are typically issued at a discount to the current market price.

This also means the equity capital of the company will get diluted by a wider margin (compared with a relatively lower dilution in a private placement or an FCCB issue, if the latter gets converted to equity).

Growth rate in earnings per share thus reduces in the interim.

But there are some advantages, too.

First, the rights offer, wherein the ratio is predetermined, leads to proportionate distribution (as per the existing shareholding) and hence no change in the shareholding pattern, unless existing shareholders do not subscribe .

In other words, it also provides comfort to the promoters. To give some examples, Indian Hotels recently announced two unlinked rights offers, which together would lead to a 30% dilution in equity.

But since the promoter holding is currently at just 29.17%, a private placement or an FCCB issue would have led to a drop in promoter holding to around 20%.

But, with the rights offer, it only ensures that the Tata group's stake in the company remains intact, unless it doesn't subscribe to the offer, which is highly unlikely.

In fact, while the first 1:5 rights offer at Rs 70 per share is attractive given the current price of Rs 123, the second offer (1:10) of 4% unsecured convertible debentures (conversion price between Rs 150-180) is far from attractive, indicating that the promoters can mop up the unsubscribed portion to hike their stake in the company, if the situation arises.

Likewise, in the case of Exide Industries, which announced a 1:15 rights offer entailing an issue of 5 crore shares at Rs 30 per share (current price Rs 60) to raise Rs 150 crore, the promoter holding currently stands at 53.42%.

Hence, an issue of 5 crore shares to entities other than existing shareholders would mean a decline in promoter holding to 50.08%.

An Exide spokesperson, however, said that it is for augmenting long-term resources and to reward shareholders.

Shahina Mukadam, head, research, IDBI Capital Market Services, said another spur is the optimism on economy and demand growth.

"Because debt is more expensive, I don't think companies would like to slow down their capital expenditure plans, and hence, they are going for rights offer,"  she said.

A correction in the stock market is also giving promoters an opportunity to consolidate their stakes through issue of warrants / rights. As far as tightening of ECB norms is concerned, it's just one of the reasons adding to higher cost of borrowing, she said.