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Overview:

          Reliance Industries Limited (RIL), Ranked 106 on the 2019 Global Fortune 500 Ranking is an Indian multinational conglomerate company. Reliance Industries is one the bellwethers of Indian Stock Markets. It came up with India's Largest Ever Rights Issue recently and successfully raised more than Rs.50,000 Crores of Capital through this issue. This Blog covers the Background of the Mega Issue and analyses the two key factors that are responsible for the blockbuster success of this issue:

          o Electronic Rights Entitlement Trading
          o 18 Month Long Staggered Payment Scheme for the Rights Issue

Glossary Terms:

Rights Issue
          An issue of shares, generally offered at a discounted price by a company to its existing shareholders in proportion to their holding of old shares for raising additional capital

Rights Entitlement
         Rights entitlements (RE) are offered to shareholders as a part of right issue by the company. It is provided as per the number of securities held till date and the ratio decided by the Company

Rights Subscription
           A Subscription Right is the right of existing shareholders in a company to retain an equal percentage ownership by subscribing to new stock issuances, generally at below market prices

Rights Lapse
           Right lapse is the cessation of privilege, in subscribing the new shares due to the passage of time or inaction

Rights Renunciation
           Shareholders who do not want to exercise their Right entitlement can sell it to the renounces. This is known as Right Renunciation.

Intrinsic Value of a Rights Entitlement
            The intrinsic value of a Rights Entitlement is the difference between the Market Price of the Share and Rights Issue Price

Time Value of Money
               The time value of money is a basic financial concept that holds that money in the present is worth more than the same sum of money to be received in the future. This is true because money that you have right now can be invested and earn a return, thus creating a larger amount of money in the future.

Discount Rate
               The discount rate is the investment rate of return that is applied to the present value calculation. In other words, the discount rate would be the forgone rate of return if an investor chose to accept an amount in the future versus the same amount today.

Electronic Trading
               Electronic or Online trading refers to the buying and selling of financial product by means of internet. Online trading may include trading in bonds, stocks and other financial instruments.

VWAP
             Volume Weighted Average Price of the Security

Build Up to the Rights Issue

             During the 12 Months preceeding to the 2019 Q2 Results Announcement of Reliance Industries, concerns about the High Debt Levels of Reliance Industries and negativity around the Share Prices started building gradually. Particularly, the three months preceeding the  announcement of 2019-20 Q2 results saw the Reliance Shares being seen negatively by a few analysts AND the share prices coming down from Rs.1409 on 3-May-2019 to Rs.1104 on 7-Aug-2019 (Source: NSE India)

           When Reliance announced their 2019-20 Q2 results on 12-Aug-2019, Chairman MukeshAmbani announced that though they ended the Previous Year with a Net Debt of Rs.154,478 Crores, Reliance had a Clear Road Map of becoming a zero net debt company within the next 18 months (by 31-Mar-2021). He also announced the Reliance Shareholders that “Reliance will reward you abundantly through higher dividends, periodic bonus issues and other means, and at a more accelerated pace than any time in our history”

         In the same address, he made a major announcement that Saudi Aramco will invest in Reliance for a 20% stake in O2C division at an Enterprise Value of US$ 75 Billion. (Expected Investment of about Rs. 1 Lakh Crore). Though there is a delay in signing the deal due to Covid 19 and Low Crude Oil Prices, RIL shares never looked back and started to soar even in the midst of the Corona Crisis. One of the Main Reasons for this is due to the Rights Issue that was announced by Reliance Industries in April 2020

Reliance Rights Announcement and its Key Success Factors

             Reliance was very keen that the Delay in Aramco Deal should not derails its plans of becoming a Zero Debt Company by 31-Mar. Reliance has always been entrusted with great levels of Confidence from both Retail and Individual Investors and hence Reliance decided to Capitalize on that and at the same time Reward their Trust by coming up with a Rights Issue after nearly 29 Years.

        Reliance started to prepare for the Rights Issue and made a Series of Strategic Investment Announcements before the Rights Issue that started Propping up the Share Price of Reliance and also after the Rights Announcement that ensured that Share Prices remained High throughout the Rights Issue Process
       • 22-Apr-2020: Facebook’s Investment Rs.43,574 Crore in Jio Platforms for a 9.99% Stake
       • 30-Apr-2020: Rights Issue Announcement for raising Rs.53.125 Crore
       • 04-May-2020: Silver Lake’s Investment Rs.5,676 Crore in Jio Platforms
       • 08-May-2020:  Vista’s Investment Rs.11,367 Crore in Jio Platforms
       • 17-May-2020: General Atlantic’s Investment Rs.6,599 Crore in Jio Platforms
       • 22-May-2020: KKR’s Investment Rs.11,367 Crore in Jio Platforms
       • 03-Jun-2020: Rights Issue Closed with an Overwhelming Investor Interest
       • 05-Jun-2020: Mubadala’s Investment Rs.9,094 Crore in Jio Platforms
       • 05-Jun-2020: Silver Lake’s Additional Investment Rs.4,547 Crore in Jio Platforms

While the above announcements ensured Investor Interest on the Rights Issue and a Higher Share Price, the Rights Issue Announced has two Major Unique Features that made the Rights Issue a Major Success for Reliance:
                     1. Online Trading Platform for Rights Entitlement Trading
                     2. Staggered Payment for the Rights Shares

Success Factor 1 :Online Trading Platform for Rights Entitlement Trading:

         SEBI has been working on improving the Rights Issue Process for the past Several Years. SEBI mooted the idea of Electronic Trading of Rights Entitlement way back in 2008 and in January 2020, SEBI announced that the Platform is Ready for all Future Issue. RIL’s Rights Issue was the First Issue to Test this Platform and Benefit from it

What is Electronic Trading of Rights Entitlement?

            One of the three choices available for a eligible shareholder is to renounce the rights (Sell the Option to Subscribe to a Rights Share) to a Third Party. Till the Reliance Issue, this was done using the Composite Application Form (CAF) and the Shareholders need to look for buyers of the Rights Entitlement in the Grey Market since there was no Formal and Electronic Market to trade the Rights Entitlement. But, according to the new Process after launch of the Trading Platform, a Rights Entitlements was credited in the Demat Accounts of Eligible Shareholders according to predefined ratio. This Rights Entitlement is a security on its own with its own ASIN and it can be traded with anyone in the secondary market similar to how any other Share is Traded. (BSE Scrip Code of Reliance Rights Entitlement is 750634 and its ISIN is INE002A20018)

This created a huge market for the Reliance Rights Entitlement Trading, which is one of the major factors for the success of Reliance Rights Issue.
                     o Total Trade Units: 114 Million
                     o 27% of Rights Issue
                     o Total Trade Volume: Rs.2,200 Crores

Success Factor 2: 18 Month Long Staggered Payment Scheme

      Reliance also offered a Staggered Payment Schemes over a Period of 18 Months for the Rights Issue. The Issue Price and Payment Terms was set as follows:
         o Rights Issue Price per Share: Rs.1257
         o Amount to be paid at the time of Allotment: Rs.314.25
         o Amount to be paid after 12 Months (May 2021): Rs.314.25
         o Amount to be paid after 18 Months (November 2021): Rs.628.50

This Staggered Payment Scheme Provided an Opportunity to Benefit for all the stakeholders. Depending on the Risk Appetite of the Investor, the Staggered Payment Option resulted in different attractive effective entry prices for the investors. Here is a sample illustration using the Time Value of Money Concept and applying Discount Rate of 8%, 12%, 16% and20%

Synergies between the 2 Key Factors

       In addition to the advantages between the above 2 factors, they both created Synergies together. The Electronic Trading Platform and the Staggered Pricing Mechanism Created a Huge and Very Efficient Trading Platform for the Investors, who took advantage of the varying Cost of Acquisition based on their Risk Appetite resulting in a WIN-WIN-WIN Situation for all Stakeholders Involved:

SEBI  has seen a Successful Overhaul of its Right Issue Process and the Rights Entitlement Trading Platform through this Rights Issue

Other Companies:Reliance Rights Issue, in spite of being the Largest Ever Rights Issue by an Indian Company had an overwhelming oversubscription of around 1.6 times, thereby proving other companies that a well thought out Strategy can make a Rights Issue highly successful

RIL:For RIL, this provided an opportunity to raise more than Rs.50000 Crore rupees without diluting their stake and meet their target of a Zero Debt Company by Mar 2021. The share price movement since the announcement of the Rights Issue certainly seem to suggest that Reliance has strengthened the Investor Confidence even more while increasing the Shareholder Wealth. Moreover, A Rights Issue is generally considered as the Capital Raising Mechanism with Lowest Cost.

Old Shareholders got an opportunity to renounce their Rights at a Much Higher Price and the Market Price of the Entitlements was always at a Premium to the Intrinsic Value. The Issue also provided an arbitrage opportunity (considering the Time Value of Money) to the Savvy Investors who didn’t want to apply for additional Rights Share.

New Investors: New Investors got an opportunity to buy the Rights Entitlements Easily through the Electronic Trading Platform. They also had an opportunity to own the Reliance (partly paid-up) Shares at a lower cost, while participating and benefiting from the growth of the company over the next 18 months.
Overall, this Rights Issue is a WIN-WIN-WIN situation for Every Stakeholder

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