As Equities Struggle, Companies Take ‘Rights’ & NCD Route To Raise Funds

There was large scale expectation that Finance Minister Nirmala Sitharaman’s maiden budget will provide a direction to the equity market. However, the optimism proved futile and the secondary equity market has become directionless following the most awaited event of the capital market. Though the resource raising activity has not come to standstill, a new trend has been witnessed in the primary market. Fund mobilization through Rights Issues and through issue of Non-Convertible Debentures (NCDs) has gathered speed.

As per the data made available by Prime Database, till June 30, 2019, Rs 3,971 crore has been mobilized through 10 issues under the category of public debt. This includes Rs 1,000 crore raised by JM Financial in May 2019 through its NCD issue. Another Rs 10,000 crore is expected to be raised by Shriram Transport during July-August 2019 through yet another NCD issue.

Rajendra Naik, MD, Investment Banking, Centrum Capital said, “With investors not wanting to take equity positions due to a volatile market, NCDs have been the flavour of the season”.

Dr V.K. Vijay Kumar, chief investment strategist, Geojit Financial services said, “The NCD issue market is dominated by non-deposit taking NBFCs like sound gold loan companies with good track record and high credit rating”.

As per Prime Database, year till date (30/06/2019), Rs 49,951 crore has been mobilized through three Rights Issues, which is by far the largest amount raised through this route in India’s capital market so far. The previous best through this route was Rs 32,519 crore from 30 Rights issues in 2007-08.

According to the Bombay Stock Exchange (BSE), in July 2019, three more (equity) Rights issues are open for subscription; they are Tata Sponge Iron (July2-16), Reliance Chemotex Industries (July8-22) and Ishan Dyes Chemicals (July 12-26).

Commenting on the spurt in number of Rights issues Dr Kumar said, “The recent mega rights issues cannot be viewed as a trend. The mega rights issues of Rs 25,000 crore each came from Airtel and Vodafone-Idea. These companies have huge debt on their books and cannot afford to increase their debt in an industry characterised by cut-throat competition and wafer thin margins”.

“The equity market is currently not ripe for equity issuances especially in mid-cap space and hence funding is available for corporates only through the NCD route and if they need equity, it is available through their current shareholders (rights issues), said Naik.