Rights issue market witnesses major downturn

MUMBAI, SEP 2: Fund mobilisation by listed companies through rights issues from shareholders has recorded a major fall in the current fina...

MUMBAI, SEP 2: Fund mobilisation by listed companies through rights issues from shareholders has recorded a major fall in the current financial year. In the first 5 months, only a handful of 10 companies have made rights issues, with an aggregate mobilisation of Rs 334 crore. Compare this with 488 companies raising Rs 12,630 crore in 1992-93, the fall becomes very apparent. The current period compares very unfavourably even with the full previous year which had seen a mobilisation of Rs 1,560 crore through 26 issues.

The continuing fall in the number of companies tapping the rights route, according to Prime Database, can be ascribed mainly to the generally depressed secondary market prices of a vast majority of companies, courtesy poor fundamentals. On the other hand, companies with good performance are preferring to meet their fund requirements through preferential allotments to mutual funds, private equity investors and venture capital funds. Among scores of companies who have recently gone through the preferential route are Himachal Futuristic Communications, Eupharma Laboratories, Henkel Spic and DSQ Biotech.

In the Indian scenario, the offer price in a rights issue has to be reasonably lower than the market price in order to generate any response from public shareholders. For several good scrips whose prices have been languishing at much less than their fundamental strengths, it is obviously not prudent to make an issue at a further discount. “Private placement is not only a more efficient process but also helps these companies derive much better valuations, sometimes even at a premium to the market price as institutional investors are willing to pay a higher price for a block deal. Interestingly, in many of these cases, the market prices go up after the preferential allotments,” Prime said.

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In addition, the regulatory measures have also made an impact. Earlier, companies would manipulate their share prices to a high level and then make a rights issue at a lower-than-market-price to make it look attractive. Regulations, including a greater information disclosure, have made such price rigging difficult. “Finally, the overall investors’ apathy towards the primary capital market consequent to the 1993-1996 fiasco, according to Prime, continues to be a major factor for the current state of the rights market. In that period, most companies had made issues at a very high premium and as these subsequently led to significant losses, the investors have just turned away.

Little wonder, as per Prime Database, over 50 companies which had earlier announced their plans during 1999 of tapping the rights route either dropped this option or pursued other alternatives. The major ones among these included Autoriders Industries, Bajaj Tempo, Cinerad, Concorde Motors, JCT Electronics, Media Video, Neuland Laboratories, Nexus Software, S Kumars Synfab, Sakthi Sugars, Saya Housing, Tasty Bite Eatables and Wockhardt Healthcare.

Given the state of the market, the future is not likely to see any significant improvement in the situation. Currently, there are only 8 companies who have applied for or obtained SEBI approval. According to Prime, the largest issue in the 5-month period was from Ceat Financial aggregating Rs 111 crore, followed by Rs 54 crore issue from SREI International Finance and Rs 51 crore issue from Ashok Leyland Finance. Significantly, the response to several issues was poor including Dewan Housing Finance, DCW and Model Financial Corporation.