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Sunday, Feb 15, 2004

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Rights offers — gaining momentum

G. Madhan

RIGHTS offers, which were rarely seen in the Indian capital markets in the last couple of years, are staging a comeback.

Since the beginning of January 2004, 13 listed companies have announced plans for raising money through the issue of shares on rights basis aggregating Rs 400 crore. If one adds the rights offers of another 13 companies announced at the fag end of last year, but which are yet to hit the market, the number is higher at about Rs 2,500 crore.

Eight other companies have announced their intentions to raise capital through rights issue without mentioning the amount involved.

In contrast, only Rs 510 crore was raised during the whole of 2003.

In a majority of cases, the rights offer price was at a discount to the market price on the date of announcement. The discounts ranged between 11 and 54 per cent. Rights offer at a discount to the ruling market price are a common practice. The discount was highest in the case of Mukand and lowest in the case of Teledata Informatics. Stock price changes both in the month prior to the announcement and in the month after the announcement were not significant.

The largest rights offer is that of Sterlite Industries, which has proposed to raise Rs 1,400 crore. Kaira Can Company is the smallest at Rs 0.5 crore. Of the 26 companies that are set to tap their existing shareholders, 12 are companies with a market capitalisation of more than Rs 100 crore.

In the case of these larger companies, the rights offers will not significantly expand their capital base. The size of the proposed rights offer in the case of the larger companies are, on an average, only about 35 per cent of their market capitalisation.

In terms of industries, companies operating in a wide range of segments ranging from auto ancillary to sugar and from paper to textiles have also announced rights issue. Some of the major players that have mulled raising equity through rights issue include Balrampur Chini Mills, CESC, Gujarat Alkalies & Chemicals and South Indian Bank.

The purposes behind the rights offers vary widely. In the case of Sterlite Industries, the capital raised will be used to finance the group's expansion plans. The company recently announced expansion plans for its affiliates Balco and Hindustan Zinc.

For Electrolux, the amount raised will be used to do financial fire-fighting. The accumulated losses of the company as on September 2003 had exceeded its net worth. The proposed rights issue of Rs 200 crore is likely to make the company's net worth positive. On the other hand, for Moschip Semiconductor, the capital raised will be used to part-fund the working capital requirements.

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