Tarang Beverages: Rs 45 Crore, Four Routes, One March Deadline
Tarang Beverages Ltd is a 22-year-old unlisted public company with paid-up equity of Rs 8 crore held by 40 shareholders, 34 of them from the founding family. Its fruit-drink plant runs at 92 per cent capacity. It needs Rs 45 crore: Rs 30 crore for a second plant and Rs 15 crore to repay a 14 per cent loan that is squeezing margins. The finance director proposes an initial public offer of Rs 45 crore - Rs 30 crore as a fresh issue and Rs 15 crore as an offer for sale by two family members. The family holds 84 per cent today. The merchant banker warns that the issue will cost about 7 per cent of the amount raised, take five to seven months, and require compliance with minimum public shareholding, listing on a recognised exchange and a full prospectus. A director suggests a private placement to 30 high-net-worth investors instead, since it is quicker and cheaper. The CFO points out that the Rs 15 crore loan repayment cannot wait beyond March.
1. Compare the IPO and the private placement on cost, time, dilution and control, and recommend a route with reasons.
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IPO: Rs 45 crore at 7 per cent costs about Rs 3.15 crore in fees, plus management time, and takes five to seven months. The Rs 15 crore loan cannot wait that long, so an IPO cannot solve the urgent problem - it arrives after the deadline. The fresh issue dilutes the family, and the minimum public shareholding rule forces the family down from 84 per cent to at most 75 per cent, while listing brings disclosure and quarterly scrutiny.
Private placement to 30 investors: weeks rather than months, materially cheaper, and it can be timed to the March repayment. But it brings no listing, so those investors have no ready exit and will demand a discount and possibly a board seat or a say in the second plant; the family's control is diluted privately rather than publicly. The 30 allottees are well within the 200-person limit for a financial year.
Recommendation - sequence them, do not choose one. Use a private placement now for the Rs 15 crore repayment (or refinance the loan), and defer the IPO until the second plant is commissioned and EBIT reflects the extra capacity. Reasons: (1) the loan repayment is a deadline, valuation is not; (2) listing after 12-18 months of higher earnings fetches a better price, since an issue is priced on demonstrated performance; (3) investors discount an issue whose stated object is repaying an old loan - growth capital is an easier story to sell.
The trade-off is explicit: the firm buys speed now with a valuation discount, and pays for control later.
2. The merchant banker reports the issue was oversubscribed four times. Explain what happens to the money of applicants who receive no shares, and who enforces this.
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Oversubscription does not mean the company raises four times the money. It receives only the issue size; the excess applications are a signal of demand used to fix the price, and must be returned.
Mechanics:
- Applicants apply through ASBA, so the money sits blocked in their bank account rather than being debited and parked with the company.
- The registrar and the merchant banker prepare the basis of allotment, approved by the stock exchange, allocating shares in the disclosed proportion across categories.
- Shares are credited to the demat accounts of successful applicants; the bank unblocks or refunds the money of the rest within the regulatory timelines, with interest for delay.
- The company lists on the exchange, and only then does a secondary market price exist.
Who enforces it: SEBI, through the ICDR Regulations and the stock exchanges' listing obligations. The merchant banker is the issue's gatekeeper and is accountable to SEBI for due diligence; the registrar handles allotment and refunds. A prospectus misstatement exposes the company, the directors and the banker to liability.
Why it matters to the board: a four-times subscription is evidence that the price band was set conservatively - the company may have left money on the table - and it validates the decision to list later rather than now.
3. Why is a rights issue unsuitable here, and what ownership constraint must the company satisfy after listing?
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Rights issue means offering shares to existing shareholders in proportion to their holding. It is cheap, fast and preserves control, which makes it the natural route for a company that already has a wide shareholder base. Tarang does not:
- It has 40 shareholders, 34 of them family. A rights issue would simply ask the same family to fund Rs 45 crore, which they cannot do - that is why they are borrowing and selling in the first place.
- It brings in no new public shareholders, so it does nothing to broaden ownership or create a market for the shares.
- If the family declines its entitlement, the issue is undersubscribed and the plan collapses.
The constraint after listing: minimum public shareholding. For a company of this size, at least 25 per cent of the post-issue capital must be held by the public. The family is at 84 per cent, so it must come down to a maximum of 75 per cent - a dilution of at least nine percentage points. Two consequences the board must plan for:
- A fresh issue alone may dilute too slowly to reach 25 per cent; the offer for sale component is what actually transfers shares to the public, which is why the finance director included it.
- The 25 per cent floor must be maintained continuously, not just at listing. Any later buyback or preferential allotment to the family must be tested against it.
Judgement: the offer for sale raises no money for the plant, so it should be sized to the compliance requirement, not to the funding need - Rs 45 crore of fresh capital is what the business requires; the dilution is a separate calculation.