Preferential allotments set to hit 5-year low

Preferential equity issuances are likely to hit their lowest mark in five years, if the trend so far in this financial year is anything to go by.

Companies have raised a total of Rs 17,346 crore through 171 issuances in the first ten months of the financial year (FY15), according to statistics from Prime Database. If the same trend continues, the capital raised by the end of the year would be less than Rs 20,000 crore.

This is the lowest amount of capital raised since FY10 when companies had raised Rs 15,294 crore.

Companies raise money in a preferential issue through sale of securities to a specific group of investors, rather than making the offer available to everyone. The investors are often promoters or others who have a longer term view on the prospects of the company.

The fall in capital raised through preferential equity issuances comes even as alternative capital raising avenues have gained traction. Companies raised Rs 26,936 crore through qualified institutional placements in FY15. Incidentally, this is also the highest amount of capital raised through the route since FY10.

Experts have attributed the rise in QIPs to the bull market, which has taken BSE’s Sensex to higher peaks over the course of the year. The Sensex is an index whose movements are seen to be representative of how the market is doing. It crossed an all-time high of 30,000 earlier in the week. It is currently at 29,448.95.

Preferential issuances drop
Year Amount (Rs. cr) No. of 
2009-10 15294 122
2010-11 29007 284
2011-12 22803 181
2012-13 41958 212
2013-14 52181 185
2014-15 (as on 31/01/15) 17346 171
Source: PRIME Database

A qualified institutional placement is a process by which shares are sold to a select group of institutional investors. It is seen as a relatively quick way for companies to raise capital since fewer regulatory clearances are required.

The fall in preferential allotments have also coincided with recent regulatory action against fraudulent use of the route. The Securities and Exchange Board of India has recently moved against a number of companies who looked to use the preferential allotment route for money laundering purposes. This included First Financial Services, Radford Global and Moryo Industries.

“..funds were brought in…through preferential allotment and invested in the shares of connected companies…for purposes other than those disclosed. The route resulted in tax-free ill-gotten gains (and)…was a well devised scheme to convert illegitimate into legitimate money by misusing the stock exchange mechanism.” said one such regulatory order.

The regulator also passed a similar order against Kamalakshi Finance Corp (KFCL) in February.

“The prima facie modus operandi appears to be same as that used in the matter of Moryo Industries…the stock exchange mechanism was used for the purpose of generating bogus LTCG (long term capital gains tax) which is tax exempt..,” it had said.

The regulator is said to be looking at other companies said to be involved in similar practices.