Financial Daily from THE HINDU group of publications
Wednesday, Nov 19, 2003
Corporate - Preferential Allotments
Cos ride market boom with preferential issues
Mumbai , Nov. 18
WITH the stock market booming, several companies have lined up preferential issues of shares, mostly at a price below that of the market.
In November alone, 11 companies have either announced plans to issue shares on preferential basis or have already allotted shares. In most of the cases, the shares are allotted to the promoters at a price below the market price.
Preferential issues are made to select investors only and are not offered to the ordinary public or the existing shareholders.
Some companies that recently made or announced plans to make preferential issue include Television Eighteen, Apollo Tyres, Avon Organics, Kale Consultants, Networth Stock Broking, Aurbindo Pharma, Jain Irrigation and Pantaloon Retail.
A look at the notices sent by companies to stock exchanges shows that there has been an increase in the number of companies that made preferential issues since August this year. During this period, the BSE Sensex went up from 4,000 to 5,000.
Market observes say the trend of offering shares on preferential basis to select investors is common in the rising stock market. According to them, there has been a rise in the preferential issues despite SEBI tightening regulations. As per revised SEBI guidelines, preferential issues will have a lock-in period of one year. The market regulator had tightened the norms in 2001-02 after several companies resorted to issue shares on preferential basis.
Market sources said this time, companies are issuing shares mostly to promoters of the company. The promoters sell their earlier stake in the market mainly to institutional investors at the current market prices.
In most of the cases, the market price of the company's share is higher than the price at which the shares are offered on preferential basis. FIIs, mutual funds and other investors generally do not subscribe to the lock-in shares. With the new practice, the companies are not only able to raise funds but are also able to maintain the promoters stake.
Market analysts said small investors are the biggest losers in this game as they lose out on the opportunity to subscribe the shares in companies at a price lower than the market price.
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