IFCI stock falls 5.5% on reports of equity conversion

New Delhi-based finance company IFCI Ltd’s stock today fell 5.5 per cent to Rs 59 on the Bombay Stock Exchange (BSE). The broader mid-cap index on BSE, which the stock represents, managed to gain 0.16 per cent.

The fall was triggered by reports that the government was considering to convert the Rs 523 crore zero-coupon, optionally-convertible debentures into equity shares. However, when contacted, an IFICI official said they had not received any official word from the government on the issue.

If the conversion goes through, the government would directly hold 42 per cent stake in the company. IFCI’s total equity base is over 703 million shares and the government would get over 502 million shares through conversion, which is likely to be at par according to the terms.

 

“This will increase the equity capital base and dilute earnings per share of the company, which is why the stock is falling. The government already holds over 28 per cent in IFCI through several state-run banks and insurance firms. It is trying to further raise its stake for future divestment. It is like creating assets from thin air,” said Kishor Ostwal, managing director of Mumbai-based CMI Research.

Life Insurance Corporation of India, General Insurance Corporation, IDBI Bank and Punjab National Bank together own a 28.17 per cent stake in IFCI. Though IFCI enjoys operational autonomy, the government plays a key role in its affairs.

It was because of the uncertainty on this debenture issue during 2007 that Morgan Stanley and Sterlite Industries backed out of buying a 26 per cent stake in the company.

“No private company would want to buy strategic stake in IFCI until there is a threat of government dictating terms on ts board,” said Ostwal.

The government had played a key role in bailing out IFCI in 2000-01 by giving assistance of Rs 523 crore through zero-coupon, optionally-convertible debentures with a maturity of 20 years. With the company reporting healthy performance for the past few quarters, the government was considering to convert the debentures into equity shares.

For the quarter ended June 2010, it posted a net profit of Rs 118 crore a rise of 18 per cent from the corresponding quarter of the previous year. Last year IFCI had also raised more than Rs 2,500 crore at competitive rates. Its capital adequacy ratio is around 17 per cent against the Reserve Bank of India norm of 10 per cent.

In reply to a question in the Lok Sabha, the government said the matter related to optionally convertible debentures was under its consideration.