Rights issues too fail to break bear stranglehold

With markets having fallen by more than 30 per cent this year, investors have become risk-averse. Higher interest rates and rising inflation coupled with crude prices may have curtailed corporate earnings growth by more than 10 per cent.

In 2007, corporate earnings saw a jump of more than 30 per cent. Now, it is expected to be in the range of 15-20 per cent. "Investors have become wary of this and are not convinced by the companies' expansion plans," said an investment banker.

In a rights issue, shares are offered to the existing shareholders at a discount to the market price. However, in a declining market, the rights issue price turns out to be quite close to the prevailing market price.

"When the stocks are undervalued, rights issue is the best way to raise money from the market. However, poor sentiment in the market is a problem in eliciting good investor response," said S Ramesh, chief operating officer, Kotak Investment Banking.

Rajiv Dalal, partner, Ernst &Young, said, "In a sliding market, the price at which rights issue debuts will always catch up with the market price. There is a time lag between when the management decides to go for a rights issue and when it officially hits the market. So by the time it hits the market, shares would have fallen to an extent that investor does not find it sensible to go for it."

The amount mobilised through rights issues in 2008 to date (Rs 19,496.70 crore) is significantly higher than 2007 (Rs 14,085 crore) in spite of a favourable market last year, mainly because of some mega rights issues by State Bank of India and Indian Hotels Company, which mopped up Rs 16,736 crore and 1446 crore respectively.

Dhanalakshmi Bank and Godrej Consumer Products were the victims of the rough market weather, which were raising Rs 198.76 crore and Rs 396 crore respectively.

While Dhanalakshmi Bank's rights issue had to be salvaged by South Indian bank and City Union Bank, in Godrej's case it was the promoters who had to take the unsubscribed portion.

Some others such as Jet Airways and Union Bank of India have deferred their plans for rights issue due to the bearish sentiment prevailing in the market.

Recently, Tata Motor's scrip fell 8.22 per cent on rights issue announcement. In yet another corporate announcement on Tuesday, Chettinad Cement deferred its rights issue citing market conditions.

The rights issues that are currently in pipeline include JK Tyres & Industries, Lotte India, Shoppers' Stop and Maral Overseas among others.