To top off the lacklustre interest from minority shareholders, JM Financial Consultants also backed out of an earlier agreement to underwrite up to 67.8% of one of the tranches, which consisted of reduced voting shares, and after renegotiating its contract, ended up taking only 9.85% of the issue. The balance of the unsubscribed shares, which amounted to 60.7% of the total issue, was instead bought by Tata Sons, the promoter of Tata Motors.
The possibility of this happening was flagged in an announcement by Tata Motors on October 16, which outlined the renegotiated underwriting agreement between the promoter and JM Financial. Bankers say it is highly unusual that an underwriter decides not to honour its agreement, but the fact that Tata Group decided to go along with JM FinancialÆs request may prompt other underwriters to try the same thing in the future. The announcement offered no explanation of why JM Financial decided to back out and the bank chose not to comment yesterday. In the initial offer document, Tata Motors said that the opinion of its board of directors is that ôthe resources of the underwriters are sufficient to enable them to discharge their underwriting obligations in fullö.
Including Tata Sons' own entitlement of 33.4%, which it had committed to buy before launch, this meant the group ended up buying 84.3% of this tranche of reduced voting shares. It also bought 91.7% of the other tranche of ordinary shares, for which it was the sole underwriter from the start, forking out a combined $739 million. The two tranches each consisted of approximately 64.176 million shares.
Although understandable given the collapse in the share price, the poor response to the offering is likely to be a disappointment to the company, especially with regard to the reduced voting shares û named A ordinary shares. This was the first time the company issued these types of shares and the aim was that the promoters would take only its entitlement and have the rest of the shares trade in the market. According to a source, the company is planning to use this new class of shares for future fund raisings, allowing it to access equity capital without the risk of the promoters losing effective control of the company.
Crucially, the A-shares also rank as qualifying shares for the purpose of the conversion of a $490 million convertible bond issued by Tata Motors in June last year. The CB, which was sold under the name of Convertible Alternative Reference Securities (CARS), was structured to minimise the potential dilution for the controlling shareholder by having the five-year, zero-coupon bonds convert into a security with different voting rights. In case no such security exists at the time of conversion, the bonds will convert into either common shares or American Depositary Shares û something the Tata Group would be keen to avoid.
While it has now ensured that there is an issue of reduced voting shares available for conversion of the CB, the new share class is likely to be quite illiquid since the total issue is only Rs19.6 billion ($395 million) with Tata Sons holding just over 84%.
The A-shares have one-tenth of the voting power of the ordinary shares, i.e. 10 A-shares entitles the holders to one vote. To compensate shareholders for this, they will pay an additional 5 percentage points of dividend on top of the amount paid to holders of the ordinary shares. The A-shares were also offered at a 10.3% discount to the ordinary shares. Minority shareholders and investors who had picked up rights in the market bought 8.3% of the ordinary shares on offer and 5.9% of the A shares.
As per the offer document Tata Motors offered 64.276 million ordinary shares at a price of Rs340 apiece and 64.276 million A-shares at Rs305 apiece. Existing shareholders were entitled to buy both classes of shares on the basis of one ordinary share and one A-share for every six existing shares.
When the offer document was published on September 18, the price on the ordinary shares represented a discount of 18.6% versus the latest National Stock Exchange closing price of Rs417.80. The day before the offer opened on September 29, the share price had dropped to 374.55 and reduced the discount to a mere 9.2%. However, the big drop came during the offer period as the broader market tumbled. Auto stocks were also particularly out of favour and market watchers say existing shareholders who may have initially planned to take up their entitlements under the rights issue were also selling. By the time the offer closed on October 20, the selling had gathered momentum and Tata MotorÆs share price had plunged to Rs244 û reversing the earlier rights issue discount into a 39% premium. Under such circumstances minority shareholders obviously saw no reason to participate in the rights issue.
The selling gathered momentum after the offer closed with the share price falling another 42% to Rs140 over the next week. As of yesterday, it had rebounded slightly to Rs193.95.
The same thing happened to Hindalco Industries, India's largest non-ferrous metal producer, which launched a Rs50.5 billion ($1 billion) rights issue before Tata Motors. When that issue opened, the offer shares were priced at a 14.9% discount to the share price, but a 28.5% drop in the share price during the offer period to Rs80.65 saw that discount turn into a 16% premium. The deal ended up 55.97% subscribed with 50% taken up by the controlling shareholders and just under 6% bought by other shareholders. This left about 34% to be covered by the lead managers and underwriters, namely ABN AMRO, Citi, Deutsche Bank, DSP Merrill Lynch and SBI Capital Markets.
One India-based banker notes that the poor outcome of these two recent offers is likely to make banks extremely cautious about getting involved in rights issues in the near future.
ôArrange yes, but underwrite no,ö the bankers says on a direct question of whether he would be willing to take any more rights issues to market. ôRights issues have become a destructive product that doesnÆt reflect the true value of the shares.ö
And it seems companies too are starting to think twice about trying to use rights issues as a means to raise equity capital, unless they are prepared to buy the whole thing themselves. Recently, Suzlon Energy, which makes generators for wind turbines, said it would hold off on a planned $360 million rights issue for now.
Alongside its underwriting obligations on the Tata Motors issue, JM Financial also acted at global coordinator and lead manager on the deal together with ICICI Securities; Citi and JPMorgan were also lead managers.
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