Tata Motors approaches underwriters for rights issue

Mumbai: Tata Motors Ltd has approached investment banks to underwrite the company’s Rs.7,500 crore rights issue to ensure that stocks are not left unsold in case there is lack of demand from shareholders because of volatile market conditions, according to three bankers who are in discussions with the company.

“There are eight investment banks that have been hired for the rights issue and all of them are underwriting it. Apart from the promoter’s portion, the rest of it will be underwritten by us,” said one of the bankers cited above, who requested anonymity because of the confidentiality of the matter.

The second banker, who also declined to be named, confirmed that eight investment banks have been approached. The bankers declined to offer a break-up of the underwriting. As on 31 December, the promoters’ stake in Tata Motors, which includes all Tata group companies, was 34.33%.

An underwriter guarantees the success of fund-raising by agreeing to purchase stocks that remain unsold.

“Typically, Tata group companies underwrite issuances because they do not want to go to the market unprepared,” said the third banker. “Since it is a brand name like Tata, we are comfortable doing the underwriting.”

In an emailed response to a query, a Tata Motors spokesperson said: “Currently the company is working on the rights issuance and any further details on the issuance will be available as and when company files its offer documents to the stock exchanges.”

The move, analysts say, may be prompted by the volatile equity markets and past experience. In 2008, a rights issue by the company failed to generate enough demand from minority shareholders, forcing the Tata group to pick up 91.7% of shares on offer.

Even though the company’s consolidated financials are much stronger now, it may not want to risk a repeat of that experience, analysts said.

“Markets are choppy at present and the price that they are offering is a reasonable one and is not a deep discount to the existing share price,” said Dara J. Kalyaniwala, vice-president, investment banking, at Prabhudas Lilladher Capital Markets Ltd. They could be looking at the underwriting option as a way to ensure that the issue is successful rather than leave it to the vagaries of the market, he said.

The issue price for the rights offer has been set at Rs.450 for ordinary shares and Rs.271 for shares with differential voting rights (DVR). Existing shareholders will be eligible to purchase six shares for every 109 held, the company said. Tata Motors plans to sell as many as 150.64 million ordinary shares and up to 26.53 million DVR stocks. If fully subscribed, this will result in a 5.5% dilution of the equity base.

Tata Motors shares have weakened since the company first said it would consider a rights issue in late January. Since 27 January, ordinary shares in Tata Motors have shed 11.5% while the benchmark Sensex has fallen 7.1%. On Friday, shares of Tata Motors gained 1.8% to Rs.535.75.

“A weak equity market since the announcement also narrowed the discount to just 15%,” said an analyst at a domestic brokerage. He declined to be identified. Moreover, a lot of investors might not like the idea of the proceeds from the issue being used for retiring debt instead of solely being used to fund growth plans, he added.

While announcing the board approval for the rights issue, the company also said it would buy back Rs.1,250 crore in secured non-convertible debentures as part of its debt-restructuring programme to ensure a healthy debt-equity mix. As on 30 September, the consolidated debt of Tata Motors stood at Rs.60,773.67 crore.

JLR, which makes Jaguar luxury sedans and premium Land Rover sport utility vehicles, has been paying an annual dividend of £150 million to parent Tata Motors for the last three years. However, Tata Motors can no longer rely only on the hefty dividend payout from JLR and the fund-raising is part of developing alternative avenues, Moreover, with losses in its domestic business piling up, the company needs to raise equity to retire debt, said the analyst cited above.