IFCI makes Rs 120 cr loss on Hindalco, Tata rights issues

With aluminium major Hindalco’s rights issue devolving last week and domestic automobile major Tata Motors expected to do so, IFCI, India’s oldest financial institution, will take a blow of over Rs 120 crore from sub-underwriting both issues.

IFCI had sub-underwritten about Rs 400 crore for the rights issues of these two companies and is now saddled with these shares that have a current market value of less than Rs 280 crore.

Both sub-underwriting contracts were struck when the scrips of both companies were 30 per cent above their current market prices, said S K Mandal, IFCI executive director. “No one anticipated that the market would crash like this,” he admitted.

The Rs 5,000-crore Hindalco rights issue was priced at Rs 96 per share and the scrip is currently trading at around Rs 65.

IFCI had an agreement with Citibank to sub-underwrite Rs 150 crore of Hindalco’s rights issue. Citibank charged underwriting fees of 3 per cent and paid IFCI 1.35 per cent, investment banking sources said.

Today, IFCI’s Rs 150 crore investment is worth Rs 102 crore, a loss of Rs 48 crore. “Fundamentally, the price of the rights issue is very attractive and it should yield significant investment in two years,” Mandal said.

Tata Motors’ Rs 4,145 crore rights issue, which closed today, comprised two parts. One was for ordinary voting shares of Rs 2,185 crore at Rs 340 per share, which the promoters had completely underwritten.

The remaining Rs 1,960 crore was for shares with lower voting rights at Rs 305 each. Of this, JM Financial underwrote Rs 1,327 crore, the non-promoters’ portion.

Of this, JM Financial signed a sub-underwriting agreement for Rs 250 crore with IFCI and paid 0.75 per cent as fees.

Since institutional investors such as Life Insurance Corporation of India and other investors including Daimler Chrysler declined to participate in the issue as they were expected to, the issue failed to garner the stipulated 90 per cent subscription, investment banking sources said.

Given that the current market price of Tata Motors' voting shares is around Rs 243, bankers feel that the shares with lower voting rights might trade around 10 per cent lower. At this rate, IFCI’s investment would be valued around Rs 180 crore against the book value of its investment of Rs 250 crore, making for a loss of Rs 70 crore.

Although IFCI officials said these investments would yield good returns over the long term, it has ruled out fresh deals for now. “In future we will be more careful,” an executive said.