RIL 'call option' timeline uncertain for Rs 53,125-crore rights issue

Unlike any typical rights issue, the 422.6 million fresh shares issued by RIL will be partly-paid
Uncertainty is continuing over the ‘call option’ for Reliance Industries’ (RIL’s) Rs 53,125-crore rights issue. While the transaction is being talked up as India’s largest equity fundraise, the initial fundraising will be only Rs 13,250 crore, with no definite timeline with regards to when shareholders will be asked to cough up the balance Rs 40,000 crore.

Unlike any typical rights issue, the 422.6 million fresh shares issued by RIL will be partly-paid, with Rs 1,257 for each share coming in two or more tranches.

RIL shareholders, as of May 14, will have to pay only Rs 314.25 per share initially, and will get a partly paid-up share with a face value Rs 2.5 each. The remaining Rs 942.75 per share will be payable later in “one or more subsequent calls as determined by the board or committee of the board, from time to time,” the company said in an exchange disclosure.

Legal experts say smaller rights issues have to exercise the ‘call option’ within a year.  However, bigger ones have the leeway to keep it indefinite.

“For rights issue of less than Rs 100 crore, it has to be fully paid within 12 months. However, for big issues like that of RIL, only 25 per cent of the issue size has to be paid upfront. 

 

 
And it is mandatory to appoint a monitoring agency to keep a watch on the use of the proceeds,” said Vishal Yaduvanshi, partner, IndusLaw. Currently, shares of RIL trade at a premium of 15 per cent to the rights issue price. The company is yet to announce the rights issue opening and closing dates. Market players say investor interest will depend on the differential between the rights issue price and the secondary market price. If the current premium sustains or widens, the rights issue will see good participation, say analysts. The separately traded partly-paid shares move locks in step with the fully paid shares, say market watchers, adding that they should have good liquidity, given their low denomination compared to the fully-paid shares.

Holders of the partly paid shares have the option to exit through the secondary market or will have to pay the balance 75 per cent when the company exercise the call option.

 
Currently, only a few stocks have partly-paid shares; Tata Steel is one of them. Even after two years of the rights issue, the company has not converted shares into fully paid.

Experts say the decision hinges on the availability of funds with promoters. The promoter holding in RIL is slightly above 50 per cent, which means the promoters have to infuse Rs 26,500 crore in the rights issue and more, if they have to exercise the underwriting option.

The timing of the ‘call option’ will be crucial in RIL’s journey to become debt-free. In August 2019, Chairman and Managing Director Mukesh Ambani told shareholders that the company will be a zero net-debt company before March 2021. However, in April, the company said it has high confidence to achieve its zero net-debt target in 2020 itself.

As of March 2020, RIL’s gross debt was at Rs 3.36 trillion and its net debt stood at Rs 1.61 Trillion. Both debt figures have seen a rise over the same period last year.

“The partly paid rights issue structure gives flexibility to the company. If the Aramco deal happens before March 31, RIL may not need additional cash and may not want to raise the full amount in a hurry,” said an analyst tracking the stock. “Also, having the option to raise the money through one or more calls gives additional comfort.”

An email sent to RIL seeking comments went unanswered.

RIL stock drops 6%

 
Shares of RIL dropped 6 per cent on Tuesday to end at Rs 1,480 on the BSE. This was the biggest single-day drop for the stock since March 23, when it had slid 13.4 per cent to end at Rs 884. Since then, the stock had rallied 80 per cent.

 

Market players said the latest fall could be due to profit-taking ahead of its rights issue. Also, concerns around appetite for the mega rights issue and data privacy concerns raised by Justice B N Srikrishna over the Jio-Facebook deal weighed on sentiment.

Technical analysts said the stock had formed “shooting star” pattern on the daily charts, which signals further weakness. BS Reporter



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