Tata Steel is planning to raise around Rs 3,300 crore by issuing corporate hybrid securities overseas. The money will be used to part-fund expansion. This the second time the steel major is planning to raise money overseas through this route. The company had raised Rs 1,500 crore through a maiden hybrid securities issue in March.
The latest exercise is part of mega fund raising plan of Tata Steel under which the company plans to mop up over Rs 7,000 crore for expanding its existing steel making capacity, setting up greenfield facilities and retiring debt. The company raised Rs 3,477 crore through a follow-on public offer in January and would complete the balance funding by way of hybrid instruments.
The company has sent a fresh proposal to raise funds through the new instrument to the finance ministry, a senior government official told FE.
?The company has requested the finance ministry for treatment of foreign investment in hybrid securities as FDI. This would then have the benefit of being an additional source of capital for investment in India without dilution of control rights in the hand of existing shareholders,? the official added.
A hybrid security is an instrument having characteristics of both debt and equity, including often having no stated maturity. That allows the securities to be counted as debt for tax purposes and as equity for ratings. These securities allow higher flexibility for corporate financing while reducing capital costs for issuers. At the same time, it adds to the investors choices for portfolio allocations. Hybrid securities do not increase the leverage on the balance sheet of the company. It also does not dilute the equity capital base and therefore be a lower cost source of funds from a corporate financing perspective.
?Hybrid instruments are attractive for companies with long-term value creating projects given its tenure and treatment. Considering Tata Steel Group?s plan for growth in the long term, it will continue to explore options raising capital in different forms in the future based on its requirements. As and when anything is finalised, it will be disclosed,? said Koushik Chatterjee, group chief financial officer, Tata Steel.
?A hybrid instrument works well for the Tata group as it prevents further dilution of promoter stake as in case equity issues and also restricts deterioration of company?s debt-equity ratio,? said an industry analyst.
Fund raising through such securities are common in the US and Europe. It is only catching up in Asia. Tata Steel is not the first among the Tata Group firms to raise funds through innovative instruments. Tata Motors had in late 2008 issued shares with differential voting rights, also a maiden approach by any Indian firm, back in 2008 to part-finance Jaguar and Land Rover buy.
In its proposal to the Foreign Investment Promotion Board (FIPB), Tata Steel has said that the hybrid securities would be issued by way of tradeable global certificates and would be listed on an overseas stock exchange. Tata Steel has also informed the government that there would be non-dilution of ownership or control in the company post issuance of hybrid securities since they did not enjoy any voting rights unlike ordinary shareholders.
The market for hybrid securities has recently opened up for Asian issuers. There have been issuance by certain larges companies in South Asia in 2010 like Huchison, Noble Group among others. No Indian company except Tata Group companies have directly issue such securities, although perpetual bonds have been issued. The difference between hybrids and normal bonds lie in the additional risks taken by the investor which gives hybrid securities character of equity.
