The recent stock market meltdown has hit fund-raising plans of many Indian companies. The most high- profile victim of the current bear phase is, however, likely to be Tata Motors, which announced a rights issue to part-fund its acquisition of Jaguar and Land Rover (JLR). When details of the rights issue were announced in May, the equity dilution was estimated to be around 45%. Since then, the company’s stock price has declined by around 40% and the initial fund raising plans now look unsustainable.

At its current stock price, Tata Motors may need to dilute its equity by nearly 65% to raise enough funds to finance the JLR deal. Equity dilution of this magnitude may not pass muster with shareholders. They will frown upon the proportionate decline in earnings per share and decrease in per share dividend income from equity dilution.

Besides, it may act as a drag on the company’s stock price. Interestingly, Tata Motors is already one of the most capitalised companies in its sector. At Rs 385.7 crore, Tata Motors’ paid-up capital is 2.7 times more than Maruti Suzuki, even though the former’s net worth (on consolidated basis) is only about 25% higher than the latter. A huge equity base eats into earnings and dividend per share, besides increasing the supply of free-float shares in the market and depressing the stock price.

The company announced plan to raise Rs 7,200 crore from its investors including promoters by way of three unlinked, but simultaneous rights issue. Besides, the company also intends to raise between Rs 2,000 crore and Rs 2,500 crore ($500-600 million) from overseas through appropriate issue of securities. In all, the company plans to raise a total of Rs 9,500 crore ($2 billion) to fund the JLR deal. One option for the company is to reduce equity portion in the funding of JLR acquisition and increase the debt component. That will, however, be risky, given the credit crunch in the global financial market and rising interest rates.

Alternatively, the company may postpone the rights issue and wait for an improvement in the equity market or a turnaround in the domestic auto market. The company has time till the middle of 2009 to repay the bridge loan taken to finance the deal.

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