Proxy advisory firm IiAS has opposed GMR Infrastructure’s (GMR) resolution to issue and allot 180 million warrants to promoter group entity GMR Infra Ventures LLP.
The proceeds will be used for repaying borrowings, and for capital expenditure and “general corporate purposes”. Each warrant is fully convertible into an equity share, of face value R1, at an exercise price determined as per Sebi (ICDR) Regulations, 2009. The relevant date for determining the price is 30 days prior to the passing of special resolution through postal ballot (in this case July 12, 2014). Applying the Sebi rules for pricing, GMR can raise around R590 crore through this resolution, assuming an issue price of about R33 a share.
As per Sebi regulations, warrant holders will have to make an upfront payment equivalent to 25% of the
exercise price, R8.3 a warrant (R150 crore in aggregate). The balance 75% will be paid as and when the warrants are converted.
The option for conversion is valid for 18 months, after which the entitlement will lapse and the entire upfront payment will have to be forfeited towards the company, according to IiAS. While IiAS recognises that there is a need for the company to raise capital, it believes equity issuance is more desirable.
“Preferential allotments adversely impact minority shareholders as they deny them the right to participate in the issuance on the same terms as promoter shareholders. Also, the promoters, while subscribing to the warrants, essentially get an option from the company to pay only 25% of the equity warrant’s value upfront and have upto 18 months to pay the balance amount. The plausible non-conversion of warrants can impact the debt repayment and long-term financial plan of the company,” said IiAS in its report.
IiAS believes that the company should consider a rights issue, underwritten by the promoters: “The promoters can then subscribe to the unsubscribed portion. This will allow all shareholders to participate and will also allow the company access to funds earlier than the period of 18 months, which would be so in the case of preferential warrants.”
IiAS is urging investors to vote against the company’s resolution to raise its borrowing limit to R20,000 crore, which is about five times higher than the total debt of R3,990 crore, as on 31 March 2014. “IiAS expects corporates to give granular details on the utilisation plans in case they seek to increase their borrowing limit by