Tata Motors has appointed European investment banking powerhouse UBS to lead an issue of

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convertible notes in global capital markets as part of its plans to raise Rs 4,700 crore.

Tata group officials said the company opted for an issue of convertible bonds overseas rather than a domestic issue of ordinary shares or ‘A’ ordinary shares through a rights issue because an overseas offering need not be priced at a discount to present market price, which is what most shareholders expect in a rights issue.

“We have to also look at how much dilution of equity will take place via a fresh issuance of equity when deciding which is the best route for the company,” a senior Tata group official told Financial Chronicle.

“The exercise will be to fund the company’s growth plans and reduce debt on the balance sheet,” said the company.

Equity brokerage analysts said, “Convertible bonds will help the company in two ways. First, most such convertible bond offerings have a conversion premium to current market price as bondholders retain the option to convert at a later date. Secondly, the company manages to postpone dilution of earnings per share to a later date when its performance wou­ld have improved.”

The company posted consolidated basic earnings per share of Rs 48.64. This will enable it to realise a higher conversion premium, say experts.

The conversion premium that Tata Motors gets to its current market price will primarily depend on what kind of profits it can show in the future, as its consolidated results for the first quarter of this financial year are yet to be announced, said analysts. Umesh Karne, auto analyst with Brics Securities, said, “The pricing of the convertible notes will depend on market conditions.”

“Tata Motors will go in for another equity issuance later to meet its growth needs,” the Tata official said. Another equity issuance would help reduce the dilution of promoters stake which stands at 37 per cent. If Tata Motors raises the entire Rs 4,700 crore at near current market prices, the Tata group’s stake in it would fall to around 33 per cent, say experts.