Aarati Krishnan
Kumar Shankar Roy

Preferential offers are emerging as a key source of funds for India Inc to fund its growth plans. The recent months have seen promoters of listed companies proposing to infuse huge sums into their companies through preferential offers of shares or warrants to fund projects.

Reliance Energy and Essar Oil are some of the larger companies that have proposed preferential allotment of shares/warrants to promoters in the last one month.

While Essar’s $2-billion preferential offer will partly fund its $6-billion refinery expansion, Reliance Energy is using the offer to prop up its net worth, as it ramps up its power and infrastructure capacities.

The promoters of Reliance Industries, Indiabulls Real Estate and Pantaloon Retail have also subscribed to large preferential offers in the past one year.

But this trend is not restricted to the high-profile names alone. Over 60 small and mid-sized companies have also lined up preferential issues to promoters over the past month alone. The largest sums through this route will be raised in the power, and oil and gas sectors — with the Rs 17,000 crore already raised by Reliance Industries and Rs 8,000 crore to be raised by Reliance Energy and Essar Oil respectively, being cases in point.

The sugar sector may be in dire straits with low prices threatening profitability, but promoter groups in the sector have been subscribing to additional shares through the preferential allotment route.

Balrampur Chini (Rs 160 crore), Dhampur Sugar (Rs 25 crore), and Simbhaoli Sugar (Rs 12 crore) are some of the companies that have raised significant sums through this route recently.

In addition, promoters of over 25 small companies from various sectors such as hotels, paper, chemicals and textiles, will be putting in anywhere between Rs 1 crore and Rs 50 crore through this route.

However, this trend could also be an indicator that companies are looking at such allotments as a substitute for high cost debt in the current interest rate scenario.

A combination of equity shares and convertible warrants is the mix most often adopted for preferential allotments to promoters. While preferential allotment of equity requires the investor to put up the money upfront, issue of warrants usually allow staggered payments, usually over an 18-month time window.

Usually, investors are required to put up only 10 per cent of the price upfront in the case of warrant issues.

Preferential allotments also offer a backdoor route for promoters to significantly hike their stakes in listed companies. But with regulations requiring such issues to be priced on the basis of recent market trends, these issues still happen at prices that are reasonably close to market prices.

This may indicate that India Inc’s promoters are still quite sanguine about the valuations that their stocks enjoy in the markets.

© Copyright 2000 - 2009 The Hindu Business Line