There's enough money for the needy, not for the greedy

By M Jagannnatham

The other day, the promoter of Subhiksha, a beleaguered grocery chain, summed up the corporate world's current dilemma simply. "We did not raise enough equity and we paid the price," the chain's managing director, R Subramanian, said.

Subhiksha, which raised Rs 750 crore of debt on a meagre equity base of Rs 32 crore, is fighting for survival. Its crisis is symptomatic of India Inc's current woes. Too much debt, too little equity. Many promoters, mesmerised by the prospect of raising equity at huge premiums, have missed the bus. Greed got the better of them. When the market started going down from January, 2008, they waited and waited, hoping it would go up. It didn't. Now, they are also paying the price.

The malaise isn't confined to the small fish. From the Tatas to the Birlas, from the Ranbaxys to the Suzlons, every business house that has made acquisitions at home or abroad has taken on more debt than it can handle. The only thing to do now is expand equity. But can this be done when the markets are down?

The answer is yes. Reason: there's no real shortage of money. Banks have sackfuls of it, but they are parking it largely in government bonds. Investors have huge surpluses: at last count, they had nearly Rs 3,00,000 crore parked in income and liquid mutual funds. Most of it is corporate money. What we are really up against is a general aversion to risk. We are also victims of the "anchoring" effect.

The "anchoring" effect refers to a phenomenon whereby human beings tend to get wedded to a number just because it's stuck in their memory. When a hawker offers to sell you a rubber ball for Rs 100, you may try and bargain it down to Rs 80 or even Rs 50, but not Rs 10. You try and get a bargain "anchored" to the hawker's high original quote.

Company promoters are similarly anchored to irrelevant prices in current market conditions. Which is why they avoid raising capital in weak markets even when money may be available -- though at a lower price per share. The key to raising capital is always price, and it follows that promoters who claim they aren't getting money for love or logic are wrong.

Let me illustrate why the "no money" chorus is self-serving rather than real. Let's say I am ICICI Bank and I want capital. The anchoring effect may tell me that money was last raised in June, 2007, at over Rs 900 a share. But, more recently, the share has been wayward, and has been fetching Rs 390-400. The tendency is to avoid raising cash at this "low" price, when some time back I could have got more. But this is a fallacy. Assuming the cash is needed, the bank should raise it now by pricing it right.

The best way to raise money in current market conditions is to make a rights issue to existing shareholders at the face value. Yes, at par. Even if the market price is, say, Rs 400, price the share at Rs 10.

You may ask: why undersell the market by such a wide margin? My answer: when you are selling the shares to yourself, does the price matter? A rights issue is nothing but a share issue made to yourself (i.e. existing shareholders, who already own the company). The money transfer is from my private pocket to my public pocket. What changes is the character of the asset I own from cash to equity. But underlying that equity is my own cash.

Now look at the market dynamics of at-par rights issues. When I announce a rights issue at Rs 10 for a share currently quoted at Rs 400, the market price will explode. It is more likely to move to Rs 500-600 or more, since buyers will get an additional share at Rs 10. This offers existing shareholders two great options: either invest more, or sell out and let others invest. Either way, cash is unlocked, and capital starts flowing in.

At last count, the 30 companies in the Bombay Stock Exchange Sensex had a collective equity base of Rs 22,800 crore and a market value of Rs 13,97,000 crore -- about 61 times as much. This means they can raise Rs 22,800 crore instantly if they all make a 1:1 rights issue at par; they can raise twice or thrice as much if they offer two or three shares at par for every existing one held. And we are talking about 30 Sensex companies when there are 2,500 actively traded shares.

The next time some promoter talks about lack of money, don't believe him. The market has enough to offer, as long as you are not too greedy for a premium.