M&M Finance Rights Issue
Updated: Jul 21, 2020
WHAT IS A RIGHTS ISSUE?
Rights issue is a privilege given to the existing shareholders to increase their exposure to the stock at a discounted price. In these rights offerings, companies grant shareholders the right, but not the obligation, to buy new shares at a discount to the current trading price. As a shareholder, you have the following three options with a rights issue,
subscribe to the rights issue in full
ignore your rights
sell the rights to someone else
Your rights allow you to decide whether you want to take up the option to buy the shares or sell your rights to other investors or the underwriter. Rights that can be traded are called renounceable rights. After they have been traded, the rights are known as nil-paid rights. The rights issued to a shareholder have value, thus compensating current shareholders for the future dilution of their existing shares' value. Dilution occurs because a rights offering spreads a company’s net profit over a larger number of shares. Thus, the company’s earnings per share, or EPS, decreases as the allocated earnings result in share dilution. A company may opt for rights issue to raise additional capital. A company may need the extra capital to meet its current financial obligation or to pay off its debt, especially when it is unable to borrow capital. However, the capital raised can be used to fund expenditures designed to expand the company's business, such as acquisitions or opening new facilities for manufacturing or sales.
REASONS COMPANIES OPT FOR A RIGHTS ISSUE
There are various reasons for a company to opt for a rights issue,
The shares are offered to the shareholders at a discounted price to encourage them to purchase the rights issue.
The company saves a significant amount of money on underwriting fees.
There is no dilution in the control of the company.
GUIDELINES REGARDING RIGHTS ISSUE
There are no restrictions on the pricing of the rights issue. It usually takes place as per the discretion of the company and the merchant bankers, except for a few rules laid down by SEBI which are to be followed. Rights issues must be kept open for at least 15 days, the issuer company can utilize the funds collected from the rights issue once the stock exchanges are satisfied that a minimum of 90% of the subscription has been received.
M&M FINANCE RIGHTS ISSUE
On July 18, 2020, the board of Mahindra and Mahindra Financial Services approved the proposal to raise funds amounting to ₹3,500 crores through its rights issue. This came after Mahindra Finance posted a 62% drop in net profit for the March quarter at ₹221 crores. The company set aside additional provisions of ₹574 crores for COVID-19 in Q4FY20. The rights issue will see Mahindra Finance raise about ₹3,500 crores for contingencies (keeping in mind that 75% of its customers opted for the first three-month moratorium) and opportunities arising out of the COVID-19-induced economic turbulence. The issue size would consist of 61.77 crores fully paid-up equity shares of face value of ₹2 each at a ratio of 1:1, for an aggregate amount not exceeding ₹3,089 crores. It would be priced at ₹50 per share, including a premium of ₹48 per share. According to its regulatory filing, the issue will open on July 28 and close on August 11.
Compared to the current market price of Rs. 225, the rights issue is priced at Rs. 50, which implies a massive discount of 77%. The record date for applying for rights issue is 23 July 2020.
According to me, M&M Finance opted for this rights issue due to the following reasons:
Protect themselves from the rising NPAs: The standalone assets under management (AUM) stood at ₹81,436 crore while the gross NPA stood at 9.19% as against 8.17%. The company set aside additional provisions of ₹574 crores for COVID-19 in Q4FY20 which indicates a minimum rise of 0.70% in NPA.
Delayed repayments: As a result of disruptions in the economy, 75% of the company’s debtors have opted for the moratorium in Q4FY20. This has caused a serious amount of damage to the company’s daily cash flow.
The revival of demand: Due to the nationwide lockdown there was a fall in demand for loans, but as the economy is getting back on track, economic activities are picking up and there has been a rising demand for loans. The company needs to have enough cash to service the demand for these loans.