The CCPS offered through the rights route will be compulsorily converted at the end of three years from the date of allotment at a premium of Rs 25 or at an average price of the equity shares quoted on the Bombay Stock Exchange, during the past six months prior to the conversion date, whichever islower. The average price will be computed based on the monthly high/low prices of the equity shares on the BSE.

Post-conversion, Tata Finance's equity will see a major jump. This will reduce the future earnings of the company. Also, the investors will have to block their funds for a long-period of three years (the conversion date). During this period, they are entitled to 10 per cent dividend which does not seem to be attractive for locking the funds for a long duration.

Even if one looks for capital appreciation after the CCPS conversion, one has to discount the pitfalls of a large equity base post-conversion and poor state of the financial sector in the country.

The company at present has an equity base of Rs 40.79 crore and Rs 75-crore worth cumulative redeemable 11 per cent preference shares of Rs 100 each. Assuming the conversion price at Rs 35, the equity will swell to Rs 52.46 crore. However, the conversion price could be even lower if the current trend of the stock on BSE continues for the nextthree years.

The Tata Finance scrip is currently quoting around Rs 32 on BSE. In fact, finance stocks are now poorly discounted on bourses. Assuming the minimum conversion price at Rs 10, the equity will double to Rs 81.59 crore.

The company is now raising money to part finance its fund requirement of Rs 1025 crore for fiscal 1998-99. The company requires funds for carrying out its operations in leasing, hire-purchase and bills discounting. Apart from the CCPS issue, the company plans to meet the funds requirement through issue of redeemable preference shares, bank borrowings, debentures, ICDs, securitisation and internal accruals.

The company enjoys funded facilities of Rs 702 crore from the banking sector for the year 1997-98 and a fixed deposit portfolio of Rs 905 crore as on June 30, 1998. Incorporated in March 1984, Tata Finance Ltd (TFL) has been promoted by Tata Industries Ltd. Promoter Tata Industries hold 19.89 per cent in Tata Finance, other corporate bodies 39.28 per cent, FIIs/banks/FIs 5.26per cent and public 35.57 per cent.

The promoter company will be fully subscribing to its rights entitlement and may also apply for additional equity shares or subscribe to the unsubscribed portion, if any, of the rights issue.

The company's performance for fiscal 1998 has not been very impressive. Although sales income rose from Rs 370 crore for the 15-month period ended June 1997, to Rs 421 crore for the 12-month period ended June 1998, net profit has fallen from Rs 59 crore to Rs 41 crore. This is mainly because of a substantial jump in interest burden from Rs 237.94 crore for the 15-month period to Rs 288.38 crore for fiscal 1997. Net profit margins saw a steep fall from 14.21 per cent in 1997 to 8.54 per cent in 1998.

The company has already filed the offer document with the Securities and Exchange Board of India and the timing of the issue is yet to be decided.