Business Daily from THE HINDU group of publications
Thursday, Jul 06, 2006
Corporate - Preferential Allotments
Tata Steel plans capital expenditure of Rs 70,000 crore over the next 10 years,
Shareholders approved enhancing the authorised share capital from Rs 850 crore to Rs 2,000 crore.
THE MITTAL EFFECT? Mr Ratan Tata, Chairman, Tata Steel Ltd, and Mr B. Muthuraman, Managing Director, at the company's AGM in Mumbai on Wednesday. Tata Steel said that it would issue preferential shares to Tata Sons. It also plans a capital expenditure of Rs 70,000 crore over the next ten years. Paul Noronha
Mumbai , July 5
Tata Steel plans capital expenditure of Rs 70,000 crore over the next 10 years, the Chairman, Mr Ratan Tata, said at the company's AGM here today.
It was Tata Steel's first shareholders' meeting since Mr L.N. Mittal's hostile bid to acquire Arcelor resulted in an agreement last month to create the 120-million tonne Arcelor-Mittal Steel combine.
Though it targets 30 mt capacity in 10 years time (similar to Nippon Steel's current capacity), Tata Steel is not currently among the world's top ten steel producers by volume. But the company is one of top three in terms of profit per tonne of steel.
Wednesday's AGM passed resolutions for raising funds, important given the company's future growth plans including three greenfield projects, further expansion at Jamshedpur and potential acquisitions.
Shareholders approved enhancing the authorised share capital from Rs 850 crore to Rs 2,000 crore, raising additional long-term resources of Rs 6,500 crore and creation of charges for borrowing up to Rs 20,000 crore. The Rs 6,500 crore includes preferential allotment to promoters, a move designed to check hostile bids and make the monies paid available to the company.
Separately, Tata Steel informed the BSE that it would issue on preferential basis 2.70 crore ordinary shares of Rs 10 each at a price of Rs 516 per share for Rs 1,393.2 crore to Tata Sons.
Also proposed were 2.85 crore warrants, each entitling Tata Sons to subscribe to one ordinary share of Tata Steel against cash payment. The promoter company would pay Rs 51.60 per warrant on allotment; Tata Sons can exercise its option after April 1, 2007but not later than 18 months from the date of issue, in accordance with SEBI prescribed pricing formula.
"You may ask why this injection of funds (Rs 6,500 crore ) is not being made as a rights issue to shareholders. The main reason for that is - through an overseas issue we can perhaps obtain prices that are close to market prices today, which, we would not be able to do in the case of shareholders who would justifiably want a discount, and a substantial discount from market value. This we will consider in time as we always have. But if we want to hold dilution to a minimum and protect existing shareholders, we expect to raise these funds in a manner that it will not exceed 15 per cent of the prevailing paid-up capital of the company.
In two tranches
"And within this, if shareholders approve, Tata Sons would be willing to consider taking a 10 per cent preferential issue at prices determined by SEBI, which I think would work out today to be about Rs 515 per share, in two tranches - 5 per cent in the current year and 5 per cent in the next year. Then if you were to ask why this is not being purchased from the market - it was felt that this amount of money, which would be about Rs 1,300 crore or so, would go into the company and, therefore, would be available to it for its growth. This was considered, therefore, to be the better proposition for the company," Mr Tata said at the AGM.
As per notice to the AGM, Tata Sons's current equity stake of 20.04 per cent in Tata Steel would go up to 23.85 per cent after the allotment of ordinary shares and 27.48 per cent after the allotment of ordinary shares on exercise of warrants.
The holding of other Tata companies, not subscribing to the preferential issue, would fall from 6.75 per cent to 6.43 per cent and on to 6.12 per cent.
In reply to investor queries, Mr Tata said, "The steel industry is very fragmented and, therefore, the vulnerability when the industry is trying to consolidate is considerable. Be it from whichever source, the industry will always be trying to consolidate as indeed we are also doing through acquisition, looking at how to get greater scale and mass. The only safeguard that we will have - because with due respect, all shareholders, when prices rise will feel within their rights to sell - is to increase the promoter's stake over time, so that at least from the promoter's stand point, the company continues to be solidly held by a major shareholder who would act in the interests of the company.
"This is a valid question that you have asked, which others have also asked and I think the only safeguard is for ourselves to have either a partner with us or to have our own stake, which will be a deterrent to a hostile take-over."
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