Shares dilution now a new method to raise capital

Gone are the days when capital was traditionally raised through IPO, Private equity, Leveraged Buyout, private placement, Bonds issues etc. and also with ADR and GDR. In modern day share dilution has become a new method to raise capital.

According to recent dilution announcements, Promoters of companies in the private sector have raised around Rs 5,000 crore by offloading a stake in their respective ventures. The promoters of five companies — Infosys, Eicher Motors, Page Industries, Jubilant Foodworks, and Castrol India have sold equity shares amounting to Rs 5,601 crore in the past two-and-half months.

The new trend looks feasible as by the sale of 1 to 2 per cent stake companies are able to collect a good chunk of money in a reckless manner. For instance, in the last week VRL Logistics diluted its 2 per cent stake to start its new airlines venture.

Eicher Motors, sold a part of their stake for around Rs 2,100 crore. According to the company, the sale was done to provide liquidity to the promoters, and the capital was to be utilised for personal purpose, such as portfolio and other investments, and for charitable purposes.

Infosys, too, sold 7.5 million equity shares of the company, for about Rs 900 crore, through open market transaction. Page Industries and Jubilant Foodworks' promoters sold shares worth  around Rs 250 crore.

Public sector counterparts are also not far behind; the Government controlled sector has raised nearly half of the amount raised by the private players. The government has been able to raise Rs 2,750 crore so far in FY17 by offloading its 11.36% stake in state-owned hydropower producer NHPC through offer for sale (OFS). Of 1,258 million equity shares, 587 million shares or 5.3% stake have been  subscribed to by the state-owned insurance giant, Life Insurance Corporation of India.

Dilution is not largely welcomed by the equity investors as dilution reduces EPS. The shares on the bourses for major diluting companies reacted ambiguously, for instance the shares of VRL logistic plunged upto 20 per cent after the announcement of dilution.