After been advised by merchant bankers that market conditions may not support a rights issue priced in the stipulated band, the India Cements management has formally written to the financial institutions, apprising them of the proposed changes in the terms.

Analysts feel the changes have been prompted by a ballooning debt-equity ratio. The company has an outstanding debt obligation of Rs 1,200 crore, most of which was raised to fund its recent acquisitions, the latest being Raasi Cements earlier this year for a sum of around Rs 400 crore.

The management will follow this up by having formal meetings with the institution representatives to ensure their full approval for the rights issue in a dull market. The Securities & Exchange Board of India (SEBI)is yet to clear the revised prospectus.

India Cements' total debt is around Rs 1,200 crore (and the company is believed to have entered into short term borrowings recently), which is why the equity balance is being provided through a straight doubling of equity instead of the originally proposed 1.5 times increase.

Also, analysts cite this as the major reason for the downscaling of the issue price, so that the equity subscription is absolutely ensured. With a price of Rs 42 to Rs 50, the much-required equity balance would have been at risk in bear market conditions.

The revised prospectus for the rights offering, specifying a lower price of Rs 25, has already been filed with SEBI.

"We wanted to play it safe," says an India Cement official. "At Rs 25, the shareholders end up with a good deal." The share is quoting at around Rs 45 on the Bombay Stock Exchange.

The proposed rights issue will part-fund the recent acquisition of Raasi Cements. The Raasi acquisition has been one of the most expensiveones.

India Cements sources say that despite the changes in the terms of the issue, the amount to be mopped up remains almost the same. "Even a 2:1 rights issue at Rs 50 per share would have brought in Rs 160 crore. The changes have been brought in to make the issue more attractive in an otherwise dull market," a company official said.

Under the new plan, the company will offer 6.43 crore equity shares at Rs 25 per share which will fetch the company Rs 160 crore.

India Cements feels that doubling the equity will not have an adverse affect on the company's finances, as it is slated to touch a capacity of 8 million tonnes to 9 million tonnes, with the proposed merger of its new acquisition Raasi Cements, and subsidiary Vishaka Cements with the parent company at a later stage. Vishaka Cements has an installed capacity of 0.9 million tonnes, while Raasi Cements produces over 1.5 million tonnes of cement annually.

INSIGHT

Little option for shareholders

As a result of change in therights offer ratio, equity dilution will be Rs 160 crore same as at Rs 50 per share. The charitable view is that the additional dilution is to part finance the possible open offer for Sri Vishnu Cements but the more realistic view is that even at Rs 42 (the lower end of the price band), ICL would not have found any buyers except Chemplast Sanamar's three subsidiaries which together hold 15.9 percent of ICL. The scrip is already down to Rs 44 leaving little option for shareholders but not to subscribe.