Ugro Capital, a non-banking finance company, is raising over Rs 1,315 crore through a cumulative convertible debenture (CCD) issue and a rights issue.The fund-raising itself is not the concern; rather, it is the cash return structure of this fund-raise that has drawn scrutiny from investor advisory firm Institutional Investor Advisory Services (IiAS). IiAS has recommended that investors vote against the proposal to raise funds via CCDs.The GenesisThis round of fund-raising has its roots in 2024, when Ugro raised Rs 1,265 crore through warrants and CCDs from marquee domestic investors. The company issued Rs 1,007 crore in warrants at a conversion price of Rs 264 per share. Regulations require warrant holders to pay 25% upfront, with the option to convert within 18 months. Ugro received 25% of the warrant proceeds at that time.Warrant holders assume the risk that if the market price falls below the conversion price, they may choose not to exercise the option and forfeit the upfront amount. Conversely, if the price rises above the conversion price, they benefit—like any equity-linked investment, warrants carry market risk.The Share Price SlideFollowing the allotment, Ugro Capital’s share price dropped below the warrant conversion price, making conversion unattractive for warrant holders.In 2025, Ugro proposed further fund-raising: a rights issue at Rs 162 per share and the issuance of CCDs to existing warrant holders and new investors. The board approved the preferential issue of up to 4.94 crore unsecured, fully paid-up CCDs of face value Rs 10 each, at an issue price of Rs 185 per share, convertible within 18 months. On June 16, Ugro’s share price closed at Rs 172.55 on the BSE.Why Are Advisory Firms Upset?According to Ugro’s postal ballot seeking shareholder approval, the CCDs will carry an upfront coupon or interest of 12.5% on the Rs 914.3 crore raised from CCD subscribers—payable even before conversion.Moreover, if these CCD investors (who also hold warrants from June 2024) choose not to convert their warrants within 18 months, they will receive an additional 12.5% coupon or interest. This means investors who hold both CCDs and 2024 warrants stand to gain extra interest if they choose not to convert their warrants—which are currently out-of-the-money given the conversion price of Rs 264.In brief:The 2024 funding round raised Rs 1,265 crore (Rs 258 crore in CCDs, Rs 1,007 crore in warrants).The current proposal aims to raise Rs 1,315 crore (Rs 915 crore in CCDs at Rs 185 per share, Rs 400 crore via rights issue at Rs 162 per share).The proposed upfront 12.5% coupon effectively aligns the CCD conversion price with the rights issue price. This raises the question: why should new shareholders unwilling to convert their 2024 warrants be treated at par with existing shareholders? Many existing shareholders may have bought shares at higher prices, encouraged by the 2024 investor disclosures and they are sitting on losses.Advisory firm IiAS is concerned that the structure unfairly compensates warrant holders for not exercising their conversion option. Essentially, warrant holders could receive Rs 46 per share for not converting, undermining SEBI regulations and disadvantaging minority shareholders. Notably, this condition was not part of the original warrant approval by the shareholders in 2024.In short, CCD holders could recover 25% of the CCD conversion value via upfront and non-conversion interest before any conversion.Ugro Capital To Raise Rs 1,322 Crore Via Compulsory Convertible Debentures, WarrantsIiAS StatementThis appears to compensate for the forfeiture of the initial 25% upfront payment on the warrants. Given the nature of warrants, they inherently carry the risk of price erosion and potential loss. Investors opting not to convert will effectively be reimbursed for the forfeited amount without bearing the full downside risk.Ugro responded that CCDs are neither legally nor structurally linked to the June 2024 warrants and that the additional coupon is not a reimbursement of the 25% warrant subscription amount—which would still be forfeited per SEBI Regulation 169(3) if warrants remain unexercised.Still, the question remains: if CCDs are unrelated to the warrants, why is the coupon tied to the non-exercise of warrants?IiAS further pointed out that the total coupon payout could be Rs 228.57 crore (25% of Rs 914.3 crore), exceeding Ugro’s FY25 pre-tax profit of Rs 203.12 crore, thereby impacting profitability.Ugro countered that the impact on the P&L would only reflect the interest expense (i.e., the difference between actual outflow and present value booked at inception), and would not be significant.Adding to the puzzle is that Ugro’s NCD issue carries a coupon rate of 10.4% — making this high-cost-high-dilution equity raise all the more perplexing.The e-voting for the postal ballot closes on June 19, 2025.UGRO Capital Targets 4% Return On Assets In Next Two Years. Read more on Business by NDTV Profit.