Reliance Rights Issue | Should You Apply?

Reliance Announces Rights Issue Worth Rs.53,125 Cr | Balance sheet Deleveraging Strategy

Introduction

Reliance Rights Issue of Rs.53,125 Cr opens for subscription for the shareholders on 20 May and will close on 3 June, 2020. Should you apply?

Reliance Industries on April 30, proposed a rights issue of Rs.53,125 Cr, the biggest equity fund raising in the Indian capital markets. The move is a step forward towards the company’s aim to become a zero-net debt company by March 2021. Thus, it is a balance sheet deleveraging strategy of RIL.

This rights issue after the recent Facebook-Reliance Jio Deal, is a tool to build confidence among the shareholders and create a great value for shareholders.

Reliance Rights Issue Explained

What is Rights Issue?

• Rights issue is particularly related to equity shareholders. It is a way by which a Listed company can raise additional capital.
• In short, It is one of the primary sources of raising funds for a company like Initial Public Offering (IPO) and Follow-on Public Offering (FPO).
• A rights issue is an invitation to existing shareholders to purchase additional new shares in the company.
• Thus the company gives its existing shareholders the right but not the obligation to subscribe to newly issued shares in proportion to their existing holdings, at a discount to the current market price.
• It is used for raising of equity funds when a company need additional capital. Thus, the company undertakes a rights issue when it needs cash for various objectives. 
• Why Does Reliance Industries Go For The Right Issue?
  • Capital Raising for :
    1. For New Business Venture
    2. To Ease Debt-burden ie. Balance sheet Deleveraging
    3. For Corporate Expansion / Takeover
• For Example – 
  • Consider a company announced a Rights Issue in the ratio 1:5. It means an existing shareholder can buy one extra shares for every five shares already held by him/her.
  • The Issue price at which the new shares are issued through the rights issue is discounted to the current market price. The primary aim to motivate existing shareholders for subscribing for the issue thus creating a tremendous value for the shareholders.
  • It is beneficial for the existing shareholders as they get additional rights (shares) at a discounted price.

RIL Aimed to be a Net Debt-free Company By March 2021

• The Debt of the company has become very high. The Consolidated debt rose to Rs.3.36 Lakh Cr from Rs.3.06 Lakh Cr in the previous quarter.
• The D/E ratio of Reliance Industries is close to 0.72
• RIL has targeted to be zero net debt company by March 2021.
  • It doesn’t mean RIL will become a virtually debt-free company. Being a capital intensive business, the debt will be there in its balance sheet.
  • RIL will be a Net-Debt Free company, when the company’s Cash Reserves will be more than its borrowings.
• There are a number of fund raising strategies in pipeline, which includes :
  1. Facebook’s Investment in Reliance Jio
  2. Cash flows from Proposed Rights Issue
  3. RIL-Saudi Aramco Deal
  4. RIL-British Petroleum Deal
• Thus, the company has declared Rights Issue for raising capital through equity and thus for deleveraging its balance sheet.
• Since it results in higher equity base for the organisation, it also provides it with better leveraging opportunities. The company becomes more comfortable when it comes to raising debt in the future as its debt-to-equity ratio reduces.
• In such case, the company goes to the existing shareholders and ask them whether they are interested in some extra shares at a discounted rate.

Reliance Announces the Biggest Rights Issue Worth Rs.53,125 Cr

• RIL announced a rights issue of Rs.53,125 Cr, the biggest equity fund raising in the Indian capital markets. The move is a step forward towards the company’s aim to become a zero-net debt company by March 2021.
• The proposed rights issue would be the first by RIL in last three decades. The last time when RIL offered shareholders the right to buy new shares was in September 1991.
• Since then, it has twice bought back equity shares (buyback) and twice declared bonus issues – dipping into its reserves to reward shareholders. In the last major corporate action, RIL had declared a 1:1 bonus issue in 2017.

Reliance Right Issue Details

Lets discuss the key details of the Reliance Industries Rights Issue.

1. Issue Size

• This Rights Issue is worth Rs.53,125 Cr.
• It is the biggest rights issue proposed by any company in the Indian Capital Market so far.

2. Issue Period

• The issue is open for subscription on May 20 and close on June 3.
  • Opening Date : May 20, 2020
  • Closing Date : June 3, 2020
• RIL had earlier fixed May 14 as the record date for determining shareholders’ eligible to apply for the issue.
  • Record Date : May 14, 2020
• The Detailed Schedule of Reliance Rights Issue is as follows :

3. Rights Entitlement Ratio

• RIL has proposed the rights issue in the ratio 1:15. It means Reliance’s shareholders can subscribe to one equity share for every 15 equity shares held by eligible shareholders as on the record date.
• This leads to 6.7% equity dilution.

Issue Price

• The rights issue price is kept at Rs.1,257 per share.
• It is about 14% discount to the Reliance Stock’s Current Market Price Rs.1,466 as on April 30, 2020.

Terms of Payment of Issue Price

• Existing shareholders of the company will have to pay only 25% for subscribing to the rights issue.
• The balance (75%) will have to be paid in two installments :
  • 25% May 2021 and
  • 50% November 2021
• The board would take the call for this purpose at the relevant time.

Total Equity Infusion by the Promoter

• The promoters- the Ambani family- hold 50.03% equity in RIL. Thus, the Total Equity Infusion by the Promoter is around Rs.26,500 Cr.
• This huge equity infusion by the promoter group to the tune of Rs.26,500 Cr indicates the promoters’ unwavering faith in the long-term prospects of RIL’s various businesses.
• Promoters’ Commitment
  • The promoters will subscribe fully to the rights issue to the extent of their holdings.
  • In addition, the promoter will also take up any unsubscribed shares in the issue.

Potential Deleveraging Measures by Reliance Industries

• “Growth is Life” is a corporate motto of Reliance Industries. Thus, staying true to its corporate motto, RIL had done big investments in multiple growth engines.
• RIL is slowly moving away from the traditional businesses – Oil & Chemical, Petrochemical that seem to have entered maturity. Consequently, debt has mounted and its balance sheet leverage has sparked concerns.
• To ease the investors’ concern, RIL has embarked on the journey of strengthening its balance sheet by targeting to become a zero net-debt company by March 2021. And it is leaving no stone unturned to reach the targeted goal.
• RIL has been monetizing assets, selling stakes in various businesses and slowing down investments. And now, the equity capital raising through a rights issue will add to the firepower to improve leverage.
• Thus, RIL has taken a slew of measures towards debt reduction as mentioned in below table :

• Facebook Investment
  • The recent Facebook deal, where the Facebook buys a 9.99% stake in Jio Platforms for Rs.43,574 Cr. Jio Platforms is a wholly-owned subsidiary of Reliance Industries Limited.
• Cash flows from Rights Issue
  • Through the proposed rights issue by the company, the total cash flows will be Rs.53,125 Cr.
• Saudi Aramco Deal (20% Stake Sale in Oil & Chemical Business)
  • In August 2019, Reliance Industries announced divestment of 20% stake in its oils-to-chemicals business to Saudi Arabian Oil Company (Saudi Aramco).
  • The expected valuation of the Oil & Chemical Business is at about $75 Billion.
  • This would lead to an investment of around $15 Billion (approximately Rs.1,05,000 Cr) from Saudi Aramco.
• RIL-British Petroleum Deal for Reliance Petroleum
  • RIL had earlier signed a joint venture in the petroleum retailing business with British Petroleum (BP). According to this deal, BP will acquire 49% stake in Petro-retail business for Rs.7,000 Cr.
  • The move is in line with the RIL’s strategy to defocus on traditional businesses.

Should You Apply for Reliance Rights Issue?

• The Reliance rights issue presents a great opportunity to existing shareholders to participate in the growth story of its Digital, Telecom and Retail business, along with the traditional business.
• These consumer-focused businesses will very soon start contributing up to 50% in RIL’s profits (EBITDA). Thus, RIL’s shareholders can reap benefits from value unlocking of new businesses over the next few years.
• Also, Reliance is having global strategic partners like Facebook, Silver Lake, Vista, General Atlantic in Jio Platforms. The total Infusion by these 4 Global Marquee Investors is around Rs.67,195 Cr. With all these cash infusions RIL is very well capitalized to invest in the opportunity they see. So the future outlook is very positive.
• Reliance Industries also have other deals on the table so they will have cash during the current times. How the situation is right now, the companies with surplus liquidity will be preferred.
• Investors should keep in mind one thing that all these Global investors are investing in Reliance Jio Platforms. While you are going to invest in Reliance Industries through this rights issue, the parent company of Jio Platforms.
• So, for direct investment in Jio Platforms, Retail Investors can also wait for Reliance Jio IPO.