Fundraising via rights offering gains currency
Regulatory tweaks, RIL’S mega issue give impetus to dealmaking through this route
Rights offering as a fundraising tool has gained currency following regulatory tweaks and success of Reliance Industries’ (RIL’S) record-breaking transaction. Over the past month, about half-a-dozen firms have launched or are in the process of issuing fresh equity shares through this route.
The Securities and Exchange Board of India’s (Sebi’s) move to make crucial changes to the rights issue framework has given an impetus to dealmaking through this route, say experts. Shortening the time period taken to complete the transaction, electronic application, and more importantly, allowing eligible shareholders to trade their rights entitlement (RES) are some of the tweaks that have given a fillip to rights offering as a fundraising instrument.
At present, the rights issues of Aditya Birla Fashion and Retail (ABFRL), Shriram Transport and PVR are open for subscription; M&M Financials and Gateway Disrtriparks will soon launch their offerings.
“You will see firms using rights issue more often. Rights issue offer full flexibility in terms of pricing. It also allows flexibility in terms of promoter participation,” Raj Balakrishnan, head of India investment banking at Bank of America.
Experts said RIL’S rights issue effectively demonstrated how some of the changes made to the rights issue framework were advantageous. For instance, RIL RE trading generated huge volumes, allowing those, who didn’t intend to apply for shares in the rights issue, sell their entitlements for an attractive price. Also, the huge premium fetched by its partly paid shares, which are traded separately, have prompted firms like ABFRL to conduct its rights programme in multiple tranches.
“Given the economic shock and its impact on many businesses, India Inc is scrambling to raise capital. Several companies are emulating RIL’S stratagem and turning to the rights issue as a way to raise capital,” said Sonam Chandwani, managing partner, KS Legal.
Already, this has been a record year in terms of total funds raised via rights issues. If the momentum sustains, CY20 may also see most issuances this decade.
In the early 1990s, rights issues were a common occurrence on Dalal Street. According to Prime Database, between 1990 and 1996, 240 rights issues, on an average, were launched every year. In the past decade, qualified institutional placements (QIPS) or preferential allotments were being preferred to raise fresh capital or issue shares to promoters. The pricing for QIPS is guided by the pricing formula prescribed by Sebi which is linked to the prevailing market price.
On the other hand, rights issue allows companies to issue shares at any price. M&M Financial on Saturday said it will issue shares under its ~3,089crore rights issue at only a fraction of the prevailing market price. Despite that, its stock zoomed 10 per cent on Monday. Experts said the attractive discount prompted many to buy the stock to be eligible to get the shares issued during the rights issue. Those who buy the stock now will be able to average their acquisition cost by applying in the rights issue. Those who don’t intend to participate can even sell their RES — which is typically the discount between prevailing market price and rights issue price. “We may see more companies pricing their rights at a deep discount. This will enable promoters to acquire more shares cheap,” said an investment banker.