Energy-to-telecoms conglomerate Reliance Industries (RIL) is in the process of India’s largest ever rights issue amounting to a staggering ₹ 53,1250 crore. The issue is significant in many ways:
- A major step towards RIL’s goal of being a zero net-debt company by March 2021;
- The first time in almost 30 years that Reliance has raised money from the public;
- The first time SEBI’s right entitlements trading platform is put to test;
- Allays concerns over the pandemic affecting investor confidence with the issue being oversubscribed 1.1 times!
HOW BIG ARE WE TALKING?
WHAT’S THE LOWDOWN?
What is a rights issue?
A rights issue is a way for the company to raise money from its existing shareholders. They are given an opportunity, i.e., a “right” to purchase more shares. This is in proportion to how many shares they currently hold.
For instance, here, Reliance is offering 1 share for every 15 shares held.
These new shares can be purchased at a discount to current market prices on a later date.
Currently, Reliance is offering a discount of 14% from the market price on 30 April 2020 with a price of INR 1257.
You would invest in a rights issue if you thought the share price would climb higher in the future. It is also a way to compensate shareholders against future dilution of earnings from each share as profits will now be spread over more shares.
What is trading of right entitlements?
Rights issue grants an option and not an obligation to buy the new discounted shares. Due to various reasons, (Eg. – you do not have the cash, or think it’s a poor investment) you may not want to buy the shares. Earlier SEBI only allowed you to let the right entitlements (RE) expire or transfer them for free. However, since January 2020 circular SEBI now allows you to sell them. This will be the first time the SEBI RE trading platform is put to test. Here, the rights issue and trading in RE will open on 20 May 2020. The RE trading will close on 29 May 2020 and the rights issue will close later on 3 June 2020.
EVERYTHING YOU NEED TO KNOW IN YOUR SPRINT TO CLASS
- Shareholders only have to pay a partial amount now and the balance when the company makes a call.
- Total face value is INR 10, with INR 2.50 payable now. Total premium is INR 1,247 with INR 311. 75 payable now.
- The money will be put to (1) paying off debt from commercial papers and non-convertible debentures and (2) general corporate purposes like growth.
THE BIG PICTURE: PAN-DEM-IC
You have got to hand it to the Ambanis! At a time when the whole business world is seized with pandemic fears, they whip out two absolute headline grabbing moves – first with Facebook’s record shattering investment in Jio and now this. Ultimate market swag. Yet on reading the rights offer letter carefully, its easy to see coronavirus risks are not far from their mind. For starters, run a search and the words COVID-19 and pandemic come up 40 times! The letter admits that the virus has already had an INR 4,245 crore on the company last quarter. It could potentially disrupt supply chains, demand and specifically affect Reliance’s oil business. It also ominously notes that it would amplify all its other risk factors.
There is a clear shift in Reliance’s broader strategy resonant with current market philosophy, “Technology is the new oil.” Jio Platforms Limited has attracted mind-boggling investments of ₹ 78,562 crores from Facebook, and private equity firms Silver Lake Partners, Vista Equity Partners, General Atlantic, and KKR. There are even talks of Microsoft looking to invest another US$ 2 billion. As if this wasn’t enough, Ambani is looking to list the company overseas, possibly US’ NASDAQ!
At the same time, it is separating its oil to chemical business into Reliance O2C Limited as it has “distinct risks, investors and nature” from the larger business. This is set to attract investment through the much-awaited deal with Saudi Arabia’s Aramco. If the diversification gamble pays off, as Jio’s success seems to indicate, then the rights issue could provide greater value. If not, it could just further dilute earnings from shares with lowered market prices.
TALK NERDY TO ME
This rights issue benefits from several recent regulatory advantages. On 22 January 2020, SEBI issued a circular to streamline the rights issue process. It aimed to reduce the time taken (around 55 days) for the process to protect against market volatility. The notice period to stock exchanges was reduced from 7 to 3 working days and advertisement time to 2 days before the issue. Common application forms can now be dispatched to shareholders and those wishing to renounce the rights. Online application and verification are now permitted.
In light of COVID-19, SEBI issued a circular on 21 April 2020 that provide certain relaxations in rights issues. The minimum subscription amount in the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 is 90%. If an issue fails to meet this threshold, all the money collected has to be refunded. The circular relaxes this to 75% provided that at least 75% of the issue size will be used for objects other than general corporate purpose. As the Reliance issue uses 99% for debt and only 1% for general corporate purpose it would qualify for this relaxation (though it clearlydoes not need it).
Experts suggest that to further improve the existing mechanism, the offer period (which is currently at 15 days) be shortened as most companies meet their subscription goals by then. Currently, rights issues are relatively sparingly used in the Indian market with only 4 having occurred in 2020. In this light some argue that Qualified Investment Buyers be allowed to subscribe to unsubscribed portions as permitted in the Companies Act 2013. This would encourage companies to choose rights issues as promoters themselves need not pick up unsubscribed portions.
GET IN ON THE ACTION
Partial payment has both its upside and downside. The advantage is that with lesser liquidity amongst investors, they can pay the balance at a later (hopefully less apocalyptic) time. The downside is that if investors are unable to pay when the call is made, the current strategy of demanding interest or forfeiture of application money maybe insufficient to cover funding requirements.
The fact that there is little history in the Indian market of trading in partly paid up shares and zero history in rights entitlements makes this excitingly dicey! Given investor confidence in Reliance being sky high, the company’s diverse holdings and widely publicized issue there are plenty of takers despite a lack of liquidity. However, with how volatile markets are, the waiting period of trading in REs may very well reduce gains.
Reliance Final Letters of Offer filed with Stock Exchanges https://www.sebi.gov.in/filings/rights-issues/may-2020/reliance-industries-limited_46675.html [335 pages]
SEBI Circular ‘Streamlining the Process of Rights Issue’ https://www.sebi.gov.in/legal/circulars/jan-2020/streamlining-the-process-of-rights-issue_45753.html
SEBI Circular o COVID-19 Relaxations for Rights Issue https://www.sebi.gov.in/legal/circulars/apr-2020/relaxations-from-certain-provisions-of-the-sebi-issue-of-capital-and-disclosure-requirements-regulations-2018-in-respect-of-rights-issue_46537.html
A Junior VC, Will Reliance’s 20 Year Big Tech Pivot Succeed?https://ajuniorvc.com/reliance-jio-investment-facebook-india-tech-startup-mukesh-amban/