Choppy markets and the art of raising money

A choppy market is a concern not just for investors, but also corporates. Companies need working capital and loans for capital expenditure and acquisitions. They typically generate it from internal accruals, debt and equity.

Their comfort level on this front has been high: internal accruals have been healthy, booming stock markets enabled them to raise capital cheaply, and if at all debt was need it was available at a low cost.

Of these, equity as a currency has great value as you can issue more to raise money or even do a swap to acquire an asset without needing cash. It can also be used as an underlying for quasi-equity issues like FCCBs, where Indian companies were even raising virtually interest free money on the back of rising equity prices. That has changed as the value of this currency has eroded in recent times.

Companies can still raise money, but more shares will have to be issued for the same capital, resulting in higher dilution, which again depresses share price. Quasi-equity too loses its attractiveness; who would want to invest when the underlying equity price is uncertain and the debt portion is a low yielding investment.

Debt is still an option as most companies have raised little or no debt in the past three-four years, and their gearing ratios are healthy. But debt too has become expensive, a trend that seems here to stay. Those who have already raised capital are lucky, the others are not as fortunate.