India's SBI taps shareholders for $4.1 billion

State Bank of India opts for a rights issue to raise much needed funds in a tough market.
The State Bank of India (SBI) has raised Rs167.4 billion ($4.1 billion) from its first share sale in more than 10 years at a time when the Indian market remains under extreme pressure. This was possible since the lender opted to make use of a rights issue, tapping its own shareholder base for the funds.

Selling shares to investors already holding the stock meant the bank were dealing with people who are supposedly already convinced of the merits of the institution. For the bankÆs foreign shareholders, this was also a unique opportunity to increase their investments. SBI has a 20% foreign ownership limit that is already full, making it impossible for them to buy additional shares in the market.

The larger shareholders would also have felt compelled to take up their full entitlement to prevent their existing stake from being diluted, thus ensuring a degree of ônaturalö demand for the issue even as the overall market suffered a selloff that pushed SBIÆs share price closer and closer towards the rights issue price and eventually erased the entire discount. As announced last month, the government invested an additional $2.46 billion to keep its stake at 59.7%, which would have helped boost the confidence of other shareholders and ensured the bank was able to pull off what sources say was the largest rights issue ever by an Indian company.

SBI, like other Indian banks, are in dire need of capital to keep up with the strong demand for loans by IndiaÆs fast-growing companies. On Tuesday, the bank also completed a $162 million ringgit-denominated bond offering, securing five-year funds at a yield of 4.9% and becoming the first Indian to raise funds in Malaysian ringgit.

Rights issues have become a more attractive option for listed Indian companies after the stockmarket regulator in November introduced new guidelines to speed up the sales process for rights issues and follow-on equity offerings for companies that meet certain criteria on minimum free-float, trading turnover, compliance with listing requirements and their track record for dealing with investor grievances, among other things. While in the past, a rights issue typically took four to five months from start to finish, it can now be completed in about two months.

SBI announced the details of its offering on January 14 after its central board approved the sale.

ôCompanies are always looking for different fund raising options and they always go for the most efficient one,ö one source says with regard to why the bank would have chosen to use a rights issue.

Other bankers expect more Indian companies will opt to do rights issues as a result of the new guidelines, especially in light of the current depressed market environment.

The key challenge for SBI was the decline in the share price, which made the rights shares relatively less attractive compared with buying the shares in the market. This would have been especially true for the smaller retail investors which hold a combined 5% of the bank, and some reports suggested that they may not have taken up their full entitlements. However, there was enough demand from other investors to make up for this shortfall and all the shares on offer were sold.

The offer, which opened on February 18, comprised 105.3 million shares at a price of Rs1,590 each. Investors were entitled to buy one new share for every five shares they held on February 4 (the record date). The offer was open to all shareholders, including those owning the bankÆs shares through global depositary receipts (GDRs).

The price represented a 35% discount to the January 14 price of Rs2,452 on the Mumbai stock exchange, but when the rights issue closed on Tuesday the share price had fallen to Rs1,592.20, wiping out virtually all of the financial reasons for buying shares through the rights offer. In the same period, the benchmark Sensex index has fallen 28.4%.

SBIÆs share price gained as much as 5.4% in intraday trading yesterday on news that the rights issue had been fully subscribed, but retreated towards the end of the session and finished up just 0.7% at Rs1,602.85.

The rights issue was arranged by Citi, CLSA, Deutsche Bank, DSP Merrill Lynch, Kotak Mahindra and SBI Capital Markets.
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