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Why is Axiata paying 8% more than other investors for Idea shares?

LiveMint logoLiveMint 15-06-2014 Mobis Philipose

Idea Cellular Ltd has priced its `3,000 crore qualified institution placement (QIP) at `134 per share and its proposed preferential allotment to Axiata Group, a large existing shareholder, at `144.68 per share.

Why is the Malaysian telecom firm paying an 8% premium?

Apart from exercising the choice of not participating in the fund-raising, Axiata had no choice but to pay a higher price—the reason being different rules for minimum pricing of issuances under the QIP route and the preferential allotment route.

The minimum issue price for QIPs is the average traded price in the preceding two weeks, according to rules prescribed by the Securities and Exchange Board of India (Sebi). For preferential issues or private placements, it’s the higher of the two weeks’ average or the average price in the past six months. Idea’s shares have been declining in the past six months and, as a result, Axiata has ended up disadvantaged.

Sebi has such rules so that the existing minority shareholders aren’t taken for a ride; and rule out the possibility of the promoter issuing shares at a low price to itself or to a handful of investors. But in this case, Axiata, an existing investor, is ending up buying shares at a higher price compared with new investors, as well as vis-à-vis the prevailing market price. Clearly, Sebi should consider allowing exceptions in some cases such as this.

Having said that, what this unusual development also reveals is that a large shareholder, who presumably has a better handle on how the company and industry is doing, is willing to invest in the company at a premium. In absolute terms, the 8% premium works out to an additional payout of less than $10 million. Even so, the investment is a vote of confidence and minority shareholders can take positive cues from it.

Besides, Idea would have raised `3,750 crore through both issues, which will help reduce its debt-equity ratio considerably and help service future obligations such as spectrum renewals and payments for spectrum won in the last auction (which has to be made in a staggered fashion). Investors should be pleased that the company moved quickly and was among the first large companies to take advantage of the revival in investor sentiment and raise equity capital.

Still, they would do well to keep an eye out for the entry of Reliance Jio Infocomm Ltd and how that might impact competitive dynamics. Analysts at Nomura Research said in a note to clients, “Structurally, Indian telcos are looking relatively appealing versus many other regional telcos at the moment… The concern or wild-card will be Reliance-Jio, and even though its launch could be delayed and there are questions on what its strategy is and how it makes money, etc.—we don’t want to be too complacent either on this event risk.”

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