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Sunday, Feb 29, 2004

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Preferential offers gain momentum

G. Madhan

IF increasing the promoters stake in companies can be interpreted as a sign of revival and confidence in their businesses, you could say the economy is beginning to shine.

Since the beginning of the year, 31 listed companies have secured board approval to raise funds through preferential offers to promoters and other investors aggregating to Rs 3,000 crore. Another 25 companies have also announced intentions to come up with preferential offers.

Interestingly, about half the amount raised through preferential offers will be from the coffers of Reliance Industries. The company is subscribing to the preferential offer of BSES, now known as Reliance Energy.

The amount that has been raised over the past two months is significant. According to CMIE, only Rs 3,922 crore was raised in the capital markets, during the whole of 2003.

In majority of the cases, the preferential offer price was at a steep discount to the market price (although well within the rules) on the date of announcement. The discounts ranged between 1.5 per cent and 53 per cent. The discount was highest in the case of Nagarjuna Construction and lowest in the case of Max India.

The stock price of several companies, in the month prior to the announcement, witnessed sharp upward movement. For instance, the stock of BSES surged 36 per cent, while Mercator Lines rose by 30 per cent. Other stocks such as Financial Technologies, FCI OEN Connectors also rallied during the period. On the other hand, the stock of a few companies such as Supreme Petrochem, Matrix Labs and Aurobindo Pharma registered a drop.

The largest preferential offer is that of Reliance Energy, which has proposed to raise Rs 2,000 crore. Shree Krishna Paper Mills is the smallest at Rs 1.2 crore. In terms of industries, companies operating in a wide range of segments ranging from auto ancillary to cement and from construction to pharmaceuticals mulled raising equity through the preferential route.

While several promoters brought in capital through the preferential route and raised their holdings in the company, financial institutions and foreign institutional investors (FIIs) were not far behind. The FIIs, who took keen interest in subscribing to these offers, include Warbug Pincus, Aeneas and Chrys Capital II.

The purpose behind the rights offers also varies widely. For Reliance Energy, the amount raised will go towards funding the investment that the company proposes to make in the areas of power generation, distribution and transmission over the next five years.

In the case of IVRCL Infrastructures, the money raised will be used to retire high-cost debts and to buy materials cash down instead of credit. It will also bolster the company's net worth and will enable them to compete for large-scale projects.

For Suven Life Sciences, the proceeds from the offer would be utilised to increase their emphasis on R&D activities and modernise and expand its manufacturing facilities.

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