Fis Favour Preferential Issue To Bail Out Stuck Projects

Financial institutions (FIs) are in favour of a case by case approach to preferential allotments made by promoters for bailing out stranded projects in which they (the FIs) hold a stake.

According to sources, preferential allotments will be permitted where the intention of the promoters is to bring in additional funds to bail out on-going projects, which are stuck at intermediate stages on account of non-availability of public funds due to a weak primary market.

However, if the intention of the promoter is to take advantage of the depressed capital market to hike his stake, then such allotments will be opposed since it would deprive other shareholders - minority and the institutional - of similar benefits.

The finance ministry had recently called a meeting to evolve guidelines for tackling preferential allotments. However, the FIs had pointed out that a blanket ban on preferential allotments would be counter-productive, since they will be unable to redeem funds already sunk in by them in partially complete projects.

The repayments will begin only when the projects are completed. If preferential allotments are not permitted, promoters will be unable to bring in their share of equity, which means that the projects will be stuck, government sources said.

Because of the tight liquidity position promoters are finding it difficult to fund their portion of equity. As a result, FIs have recently started promoter funding - lending to promoters to fund their equity requirement against a surety - to bail out these projects.

After the Controller of Capital Issues was abolished and free pricing introduced in the primary market, many promoters abused the preferential route to make share allotments to themselves at large discounts.