Rights rise 144% as investors take fresh bets on their cos

The amount of money raised by companies in 2010 through rights issues more than doubled over 2009, as companies turned to existing investors for their capital needs.

They raised Rs9,203.21 crore through 23 issues in 2010.
Though the number of issues was the same in 2009, the money raised was only Rs3,774.34 crore.

A rights issue allows a company to raise capital by selling securities to the existing shareholders of a company.

Rights issues can be in the form a sale of additional shares, debt instruments or securities which can be converted at a later point into equities, called convertibles.

The reason for the rise could be that existing investors wished to avoid dilution in their holdings, according to investment bankers.
“Rights issue is a preferred means of fund raising when dilution is not an option for the existing shareholders. It provides a mechanism for the company to raise equity capital, irrespective of general market sentiments,  while giving opportunity to all shareholders to participate in the process,” said Gautam Gupte, director at Ambit Corporate Finance.

“The promoters might have had the option of going for Qualified Institutional Placement also but that might have led to dilution of promoters stake. When the markets are doing fine the existing shareholders and also the companies love to stay invested or maintain their holdings,” said Brijesh Koshal — managing director, investment banking, Daiwa Capital Markets India.
Religare Enterprises came out with the largest rights issue of the year, raising `1,814 crore in March.

Adani Enterprises followed in April with Rs1,479 crore, while Suzlon Energy came in third with Rs1,308 crore with an issue that came out in August.

The rights issues were seen across the industries such as financial services, infrastructure, banking, media, power and retail, according to a report by SMC Global Securities.

The average rights issue during 2010 works out to about Rs400 crores compared with the average rights issue of Rs170 crores last year.

The outlook for rights issues is mixed at the moment.
The higher rate of interest compared to last year, liquidity tightness in the banking system, good valuations and decent market sentiments may lead the companies for equity raising through rights issues, according to Brijesh Koshal.

“For listed companies the options are follow-on public offers (FPOs), qualified institutional placements or preferential issues -these options lead to promoter’s stake getting diluted. Given the combination of above factors, I see a robust pipe line of rights issues this year as well,” he said.

While dilution may continue to be a concern, valuations may see equity placements gaining an edge, suggested Gautam Gupte.
“Qualified institutional placements typically offer better valuations than rights issues. With stock markets doing well, this could result in them emerging as a better option,” he said.

There are Rs 2,049.38 crore worth of rights issues lined up. The Securities and Exchange Board of India has given approval to these issues but the date for them is yet to be announced.