Since January, over a dozen companies, mostly small and medium-sized firms, have seen their promoters and other large shareholders raise stake through the route, at a premium ranging from 5% to as high as 132% over their respective market prices on the date of conversion.
While some of these companies had subscribed to the warrants at a premium to the prevailing share prices in generally bullish market conditions in the second half of 2010, the difference has only widened amid a fall in the share price in extremely weak market conditions last year. Even after the recent recovery, the shares continue to trade lower than the conversion prices as, according to the bankers, the conversion moves failed to boost investor sentiment, which is currently weighed down by broader concerns over unfavourable economic and political conditions in the country.
"Exercising conversion option at a premium is a signal to the shareholders and prospective investors that the promoters are confident about the company's prospects and that the stock is undervalued," said Devesh Kumar, managing director and head of equities (India), RBS Equities. Some of the promoters may have opted for conversion of their warrants as they did not want to lose the upfront payment made at the time of allotment of the securities, he added.
The limit for the initial subscription amount is now higher at 25% compared with 10% in the past. Topping the list is Tata Steel where the group holding company Tata Sons raised its stake marginally by converting 1.2 crore warrants into the equivalent number of shares at a price of Rs 594 per share.
On Wednesday, the stock closed 4% up at Rs 472 on the BSE, 21% lower than the conversion price. Breweries and distilleries company Tilaknagar Inds is the most recent example where the company's promoters converted 42.8 lakh shares at Rs 73 per share. The stock closed marginally up at Rs 59.8 on Wednesday. Justifying his move to convert the warrants at a premium, Tilaknagar Inds chairman and managing director Amit Dahanukar said, "The company will use the promoters' funds for consolidation of their stake and also for expansion of facilities and aggressive marketing".
"Promoters of large and medium-sized companies prefer to exercise conversion option unless there is huge difference between the conversion and market price. Such a move has many advantages as it helps the promoter raise their holding and also keeps shareholders' morale high", said Almondz Global Securities associate director and head of investment banking Sharad Rathi.