TCS placement fares well without hedge funds

Tata Consultancy becomes the first Indian company to do an equity deal of size since the regulators clamped down on buying of P-Notes by foreign investors.
A Rs12.1 billion ($308 million) block of IndiaÆs Tata Consultancy Services changed hands last week at a tight 2.7% discount to the latest close. The deal, which was done as an accelerated bookbuild transaction, was also increased from an original size of about $250 million following strong investor demand.

The level of demand surprised some observers as there was no participation by hedge funds due to restrictions imposed by the Indian stock market regulator on the use of so called participatory notes, or P-notes, to invest in the Indian stock market. Hedge funds that are not registered in India cannot invest directly in the stock market and have been using P-notes extensively to gain exposure to this market. P-notes are issued by India-based brokerage firms which first buy the underlying stock in the market and then sell the rights to this stock to foreign investors in the form of P-notes, while holding on to the actual shares themselves.

This was the first equity transaction of size by an Indian company since these regulations were put in place last month and the fact that long-only funds were able to carry a non-marketed deal of this size should be comforting to the other issuers in the pipeline.

Another challenge to overcome for Tata Sons, which was the seller of the TCS block, was the current poor sentiment for the technology sector. Information technology stocks, including TCS has been underperforming the broader Indian market partly because of the rupee appreciation, which has made it harder for these companies to compete internationally, partly because of concerns about a US slowdown.

To go out with an offer to sell the shares at a discount between 0% and 3% was thus quite a bold move, and sources say two other banks that were originally mandated for the deal declined to participate at those terms. But DSP Merrill Lynch was apparently convinced that it would find enough buyers and the fact that it was able to tighten the discount slightly to 2.7% indicates that it was right.

ôIf hedge funds had been allowed to invest, I think they could have tightened the discount even further,ö one observer says.

The final price was fixed at Rs1,020, which compares with the a close at Rs1048.50 on Tuesday (October 30) when the deal was completed. Tata Sons sold 11.86 million shares after the deal was upsized, which is equal to 1.2% of the company or about 6.8%-7.7% of the free-float.

The order book was predominantly made up of international long-only funds, with some local funds contributing about 10% of the demand. Existing shareholders were said to have taken the majority of the deal.

Tata Sons is the promoter of all the main companies within the Tata group and will still hold about 75% of TCS after this sale. It is raising cash ahead of a $2.4 billion combined rights issue and sale of convertible preference shares by Tata Steel that is coming up this month and which it has committed to underwrite in full. And with the funding requirements related to Tata SteelÆs acquisition of Corus, the Tata group is expected to come back to the equity market from time to time to raise more cash, bankers say.

In August Tata Steel raised $874 million from a convertible bond issue that made use of a new structure referred to as convertible alternative reference securities (CARS) which is designed to minimise the potential dilution for the controlling shareholders by allowing the issuer to deliver non-voting shares upon conversion. The same structure was pioneered by another Tata group company û Tata Motors û in a $450 million deal in June.

TCSÆs share price has fallen in each of the three sessions since the sell-down, but still closed slightly above the placement price on Friday at Rs1,021.20.

Meanwhile, investors are eyeing a few large deals in the Indian IPO pipeline, including a $3.3 billion offering by Reliance Power. This deal was initially expected to come this month and eight banks mandated as bookrunners are currently working on making it happen. However, the spin-off from oil producer Reliance Energy has been challenged by a number of parties claiming that the parent has transferred power generated assets to this new unit without shareholder approval, making the timing uncertain.

Meanwhile, Mundra Port and Special Economic Zone is currently in the market with a Rs17.71 billion ($450 million) IPO. The deal, which will close on Wednesday, is 5.6 times covered after the first two days of bookbuilding. Investors are keen on the offering because this is the first private sector ports asset to go public in India and on top of that it also owns a large parcel of land surrounding the port which it will develop into an SEZ. The proximity to the port should help attract quality industries to this new economic zone, the observers say.

DSP Merrill, Enam, JM Financial, SBI Capital Markets and SSKI Corporate Finance are the joint bookrunners.

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