As stock prices dip, promoters shop via preferential route

View this as a good way of raising stakes firms too, see it as an option to raise cash

Promoters are using falling stock prices as an opportunity to increase stakes in their companies. A slew of companies have made preferential allotment of shares or warrants to promoters in recent weeks.

Some prominent names include the Kumar Mangalam Birla-led Aditya Birla Nuvo and Hindalco, RPG-group company Ceat Ltd and Tata Group-promoted Tata Metalliks. Apart from these more than 20 mid and small-cap companies have made such allotments to promoters or promoter groups, since March.

While allotment of shares will bring much-needed fresh capital into companies, warrants are instruments which promoters use to buy an option and increase their stakes by paying a fraction as premium.

Independent stock market analyst S P Tulsian said “A lot of promoters want to increase their stakes but only those with sufficient funds are able to invest through preferential allotments.” According to him, but for the liquidity crunch in the system, more promoters would opt for such placements.

Companies which have recently allotted shares/ warrant to promoters

* Tata Metalliks

* Aditya Birla Nuvo

* Ceat 

* Hindalco

* Hindustan Motors 

* Micro Tech

* JK Sugar

* Religare Enterprises 

Source: Capital Line, BSE

Companies also see this as a viable option when other sources of capital have dried up.

“Raising money from external resources is becoming increasingly difficult. Hence, promoters, with good cash levels are looking at investing in their companies,” said Sandip Sabharwal, chief executive officer of Portfolio Management Services, Prabhudas Lilladher. “A lot of small companies have valuations that are extremely cheap. Promoters of these companies must be of the view that it is a good time to increase their holdings,” he added.

The cost of funds have shot up sharply, as most banks have their base rates at more than 10 per cent, while short-term one-year certificates of deposit rates are close to 11 per cent. The recent correction in the stock market, which once again brought share prices to attractive levels, is seen as a trigger for such allotments. After a sharp run-up since the start of the year, the Bombay Stock Exchange benchmark, the Sensex has corrected close to seven per cent from the highs reached in February.

According to market observers, a majority of promoters are opting for the warrant route instead of direct share allotment, as they have to pay only a marginal amount upfront and share conversion is optional. “Most promoters chose warrants over shares, as it offers more flexibility in terms of deferring payment or cancellation, if share prices go below the conversion price,” said Rajeev Thakkar, CEO, Parag Parikh Financial Advisory Services.