Engineering and construction company Larsen & Toubro (L&T) set the ball rolling earlier this

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month for combo offers of equity plus convertible bonds, where the debt issue sweetened the otherwise unattractive share pricing for investors.

L&T raised $400 million through sale of shares to institutional investors and another $200 million through a concurrent issue of convertible bonds offering an attractive fixed return for investors investing in equity shares.

The convertible bonds offered a yield to maturity of 3.5 per cent, nearly 300 basis points (one basis point is one hundredth of one per cent) above the benchmark six-month London inter-bank offered rate (Libor). The spread offered was high for a company like L&T.

The return offered on the convertible bond was meant to offset the unattractive pricing of equity shares. The pricing of equity shares was constrained by the base price created by the Securities and Exchange Board of India (Sebi) formula.

L&T priced the equity shares at Rs 1,659.30 per share, similar to the price of Rs 1,659.29 derived through the Sebi pricing formula.

"Investors found this share price a little on the higher side and the company was in no position to offer the shares at a lower price for regulatory reasons," said an investment banker, who did not want to be named.

About a week later, Tata Motors mimicked them with a combo offer. The company raised $750 million through concurrent offerings of equity shares and convertible bonds to investors.

The yield to maturity on the convertible bonds issued by Tata Motors along with the equity shares is 5.5 per cent. The truck and car maker had priced the global depository receipts issue at Rs 580.35 a share.

Tata Motors vice-chairman Ravi Kant said, "This is a significant milestone for Tata Motors. This transaction is reaffirmation of investor confidence in the automotive sector."

Investment bankers said Tata Motors was seeking to raise funds for quite some time as regulations prevented pricing of equity shares attractively. "Tata Motors finally breached the regulatory deadlock with the combined offer," an official with a foreign investment bank said.