Rights issue becomes the new favourite; what's the rush for?

A trend seems to have emerged among listed companies of raising funds via rights issue. Many companies, including the likes of Mahindra & Mahindra Financial Services, PVR, Shriram Transport Finance, Aditya Birla Fashion, Reliance Industries (RIL), have offered their shareholders a chance to solidify their holding at a time when investor confidence is riding high despite the rising number of COVID-19 cases in the country.

Ample liquidity due to stimulus packages from central banks and relatively cheap valuations in the aftermath of COVID-19-led crash could have been the fillip companies needed to opt for rights issue as the preferred means of raising funds as opposed to qualified institutional placements (QIP), experts suggested.

"It is understood that when valuations are stretched, companies usually raise capital via QIP route. And when shares are reasonably priced or are undervalued, promoters generally raise additional capital for growth through a rights issue, giving a chance to existing shareholders to buy the stock at a discounted price," said Nirali Shah, Senior Research Analyst, Samco Securities.

According to Shah, investors should not always view raising funds as a quick fix to a bleeding balance sheet but should rather concentrate on why the company is raising funds. In many cases, companies use the funds for capital expenditure which is a telling sign that the management is optimistic about the growth prospects of the company.

"...raising of funds also shows the management’s confidence in the growth of their company. It is not always the case that additional capital is raised only because the company’s balance sheet is bleeding. Capital can also be raised to accentuate growth and expansion," she said.

A rights issue is a mechanism for listed firms to raise additional capital by inviting existing shareholders to buy new shares proportionate to their existing holding at a discount to the prevailing market price.

Also Read: Rights issue bandwagon: M&M Financial, PVR, Shriram Transport & ABFRL gain

Purpose of recent rights issue by companies

Mahindra & Mahindra Financial Services is the latest firm to float a rights issue on D-Street. The company plans to raise Rs 3,089 crore and will issue 61,77,64,960, fully paid-up equity shares of the face value of Rs 2 each at Rs 50 per share for the same, which is a near 70 percent discount to its last traded price. The issue will open for subscription July 28, and the closing date is August 11.

According to the management of the company, the rights issue is their way of thanking shareholders in the company's silver jubilee year. And thankful they were, as the scrip climbed over 10 percent on July 20, the announcement date. Although, the sharp rise can also be attributed to the stellar returns the company posted for the quarter ended June 2020.

The pricing of the issues was also hailed by analysts Moneycontrol spoke to. They believe that the company has multiple moats including a strong rural presence. Efficient cost control along with low borrowing cost also puts the company is a favourable position

“The announcement of the rights issue at a steep discount of Rs 50 against July 17's closing of Rs 207 per share is likely to be taken positively by the market. More than the rights issue, the steady growth in business along with signs of improvement in the niche segment of the company is likely to aid stock rally on a short-term basis,” Dinesh Rohira, Founder-CEO,  5nance.com told Moneycontrol.

Earlier this month, India’s largest operator of multi-screen theatres, PVR also announced a Rs 300 crore rights which opened for subscription on July 17 and will close on July 31. The price of the issue was fixed at Rs 784 per equity share.

According to media reports, the Ajay Bijli-owned firm intends to utilise the net proceeds from the issue towards repayment or prepayment of the principal and or interest of certain borrowings availed by the company. PVR may also use the proceeds for general corporate purposes.

PVR, which has 176 properties and a total of 845 screens across India, had completed a Qualified Institutional Placement (QIP) in October 2019. The fundraising round led to an inflow of Rs 500 crore.

Part of the QIP proceeds was utilised towards prepayment of existing debt obligation.

Shriram Transport Finance launched its Rs 1,500 crore rights issue on 16 July at a price of Rs 570 per share. The rights issue will close on 30 July.

Even though the lender did not reveal the purpose of raising funds, it said that its promoter entities will be subscribing to the entire portion of rights shares they are eligible for.