More Indian companies will raise money by rights issue or issuing shares to shareholders and sell stake to private equity funds cheaper as falling stock market shuts the tap to raise capital.
?The only and the best way is to issue shares to shareholders and raise money from private equity funds,? says the managing director of a foreign investment bank. ?Effectively, the company sells shares cheaper.?
Roughly 25 companies until Monday have sought permission from the Securities and Exchange Board of India (Sebi) to raise money by issuing shares to their shareholders this financial year. Rights issue is a win win for both shareholders and owners. Shareholders can purchase shares cheaper and can lower the average acquisition cost. Owners can raise stake in companies by buying unsold shares in the rights issue.
Kushagra Bajaj, the owner of sugar producer Bajaj Hindusthan, invested R822 crore to purchase the unsold shares in the rights issue, which proposed to raise R1,480 crore to build a power plant. Investors bought only R522 crore worth of shares.
?It is the promoters’ ability to fund hung up projects from the current level of shareholding,? says S Ramesh, president, Kotak Mahindra Capital Company, the investment banking arm of private sector Kotak Mahindra Bank. ?Companies are not getting a fair valuation from the stock market.? ?So, the one option is rights issue and other, selling shares to private equity funds,? he added.
Indian companies are struggling to stem the rise in cost of funds after the Reserve Bank of India hiked key lending interest rates of banks. Even companies are unable to purchase raw materials from global market despite softening of commodities as they have pay more with rupee depreciating against the dollar.
?The fiscal second quarter results were depressing to the stock market. As pressure on companies builds up, the stock market will be volatile,” says PR Dilip, managing director, Impetus Wealth Management.
?There is a new realism that the meltdown will be larger and higher debt and hung up projects add pressure to promoters to raise money,” says Ramesh of Kotak.
Lenders say the ability of a company to raise money depends on the viability of the project. ?It may be a challenge to raise money,” says a senior official from IDFC, which lends primarily to companies which build power, roads and power plants. ?Right now, investors will be cautious to invest in equities.? IDFC’s loan disbursement has fallen by 50% in the fiscal second half as it is unable to find many large quality projects.
?Mid and smallcap companies and companies which build roads, bridges, airports and power plants will choose rights issue to raise money,” says the managing director of a domestic investment bank.