Proxy firms divided over Indiabulls' preferential allotment

Indiabulls recently said group chairman Sameer Gehlaut would buy 10% stake in the company for Rs 538 cr

Proxy advisory firms seem to be split on the issue of asking shareholders of Indiabulls Real Estate to vote for or against a proposal seeking their approval for preferential allotment of equity shares and warrants to their main promoter.

Indiabulls recently said group Chairman Sameer Gehlaut would buy 10 per cent stake in the company for Rs 538 crore. It said Gehlaut would buy five per cent through preferential allotment and subscribe to 43.6 million warrants, equivalent to five per cent stake in the company on conversion, at a price of Rs 67 a share, 59 per cent premium to the stock’s closing price on June 19.

Mumbai-based IiAS came out with an advisory on June 30, asking shareholders to vote for the allotment. It said: “While we generally do not favour preferential allotment of warrants, we find that in this case the exercise price for promoters is at a 59 per cent premium to the market price on the relevant date. The proposed issuance will improve the net worth and, consequently, help the company maintain a healthy balance between the debt and equity,” said IiAS.

Last Friday, another Mumbai-based proxy advisory firm Stakeholder Empowerment Services (SES) came out with a recommendation, asking minority shareholders to reject the proposal citing significant dilution of their holding in the company. “We believe any fresh issue should be made to all existing shareholders uniformally unless it is strategic partners. Preferential allotment is no-no for us,” said J N Gupta, managing director, SES.

In a note, SES said if price pattern of the equity shares of the company was examined, it indicates that the price of shares had incidentally dipped to its lowest (in about five years) near the relevant date.

When contacted, Indiabulls said the equity infusion is as much as 10 per cent of net debt of the company and therefore would help in immediate debt reduction. “There is nothing preferential in this for the promoters, who could anyway have chosen to acquire up to 5 per cent stake through creeping acquisition. This equity infusion in the company goes a long way in improving the quality of balance sheet,” it said.

Indiabulls said other options to raise capital such as rights issue were not practical in the overall macro environment around the sector and especially when the market price is at 25 per cent discount to preferential issue price of Rs 67 per share. The issue price was at a 59 per cent premium to the market price of Rs 42 per share at the time of announcement, and the price has rallied after the equity infusion announcement.