Tuesday, May 26, 2015

Is Tata Motors' Rights issue right?

Tata Motors Ltd. recently issued rights shares. The issue closed on 2nd of May, 2015. By this time, the company should have had an inkling of its financial performance for the whole year 2014-15 including the 4th quarter. However, the shareholder-applicants were aware of performance upto 31st December, 2014 only.

In the abridged letter of offer, the company mentioned that its sales of vehicles in January, 2015 was 5% more than in 2014 and its sales in February, 2015 was 11% more than in 2014. Thus a shareholder could only have assumed that things were either better in 2014-15 compared to 2013-14 or atleast things were not worse.

Accordingly, the market expectation as reported in the media was that net profit on consolidated basis would be Rs.4150 crore for the 4th quarter. It actually turned out to be Rs.1747 crore only. Standalone EPS for 2014-15 is negative at Rs.14.72. The company says that the adverse results are caused by 1) higher depreciation and amortisation and 2) adverse MTM of unmatured hedges not eligible for hedge accounting. These factors must have been in the knowledge of the company though the shareholders could not have foreseen them in the normal course.

Thus there was definitely asymmetric information available with the company and its shareholders.  In a situation like this, a well-managed trust-worthy company could have stalled the rights issue process and earned more goodwill. Legal implications of this issue are not clear. But, in an ethical sense, this is a stigma on Tata Motors.

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