Saibal C. Pal

Rights Issues (RIs) were out of favour with corporate India in  2009. Reason for such situation was due to depressed sentiments in the capital  market. In  2008 ,companies  raised Rs 29,786 Cr through RIs  which reduced in 2009 to Rs 2,525 Cr . Reduction was to the extent of Rs 27,261 Cr over the previous year. Promoters prefer RI route to raise fund as it is a cheaper mode of obtaining fund from the market without disturbing the shareholding pattern. In fact promoters can  raise their stake in the company at cheaper price. Small investors also find rights issue an attractive means of investment if a company gives attractive returns. In a RI all shareholders have the right to  participate .

Qualified Institutional Placements (QIPs) of equity shares or convertible securities is a method of raising finance by listed companies. Advantage of QIPS being companies can raise the required fund at a short   time. It does not involve much paper work. However, such placements are meant only for  Qualified Institutional Buyers(QIBs) which includes Banks ,FIs, FIIs,  Mutual Fund, etc.,as defined in  R 2(1)(za) of the SEBI (Issue of Capital and Disclosure Requirements) Regulations,2009 (`ICDR’) . QIBs subscribing in such placement which is a preferential offer may not be existing shareholders of a company. Market for QIPs is, therefore, restricted and can be availed by listed companies with track record.

Rights issue offers existing shareholders the right to buy a proportional number of additional securities at a given price, usually at a discount, within a short period. Rights issues are preferred  when capital market is relatively stable and promoters look for fund without dilution of their shareholding. Further when companies find it difficult to attract institutional investors to fund their working capital requirement.

In 2009 48 QIPS raised Rs 33,780.77 Cr against Rs 3586.45 Cr in  2008. Amount raised dipped from the amount of  Rs 23,338 Cr raised in 2007. With the mandatory requirement of naming  QIBs in QIPs in the documents, from May 1,2010 onwards,  companies may prefer to adopt the RI route. Of course such RIs will have to comply with the provisions of ICDR  contained in Chapter II ( Common Conditions For Public and Rights Issues) in coming out with such issues with the necessary filings with SEBI. Companies are ready to wait for the period required to complete the provisions of ICDR to avail of cheaper funds with the economy picking up and the conditions promising growth. RIs below Rs 50 lacs, however, are not required to follow the requirements of  Chapter II. But the amount is too small to attract  large companies. Does the amount of Rs 50 lac need a re-look by the companies and SEBI considering the fact the said  exemption amount is continuing for quite some time. Question is who will move first.

In 2009 cash-trapped Indian listed  companies availed of the QIP route introduced in 2006, to raise fund for their operations. Depression in 2009 following the debacle of 2008, hit the real estate sector and it is learnt that Unitech Ltd., India’s second largest real estate company , in terms of market capitalization  raised fund through the QIP route to the extent of Rs 1621.1 Cr during March alone last year. Other real estate companies adopted the methodology  to meet  the situation for filling working capital gap. Post April, 2010 Merchant Bankers/Investment Bankers  will be occupied with filings with SEBI for RIs of companies.

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