Reliance Industries Limited (RIL) made the largest ever rights issue in India of Rs.53215 crore on 20th May.
Before this, Bharti Airtel and Vodafone Idea came out with rights issues of Rs 25,000 crore each in 2019. Tata Steel did a Rs 12,800 crore rights issue in 2018.
Source: ET
It is the first such issue made by RIL in nearly 30 years.
The company is set to issue 42.26 crore equity shares (of the face value of Rs.10 each) at Rs.1257 each. If some shares remain unsubscribed, the promoters of RIL ((Ambani family) have promised to buy them, reflecting their confidence in the growth prospects of the company
What is rights issue?
When a company wants to raise funds from the public, it has an option to issue right shares to the existing shareholders.
In a rights issue, the company gives the existing shareholders ‘right’ to buy additional shares at a discounted price. The right shares are offered in a certain proportion of shares already held. For instance- RIL is offering 1 share for every 15 shares held. It means, if you have 30 shares of RIL, you have the right (but not the obligation) to buy 2 right shares issued by RIL. (However, if the number of shares is not a multiple of 15, there will be no fractional entitlement. Suppose you have 40 shares, you will get the right to buy 2 shares only)
The existing shareholders and number of shares held are determined as per the names existing on the shareholders’ register as on a record/ cut-off date. In RIL’s case, the record date was fixed as 14th May.
The right shares are usually issued at a discount to the prevailing market price. RIL shares are priced at Rs.1257 (The RIL issue was announced on 30th April at a 14 % discount to the closing price (Rs.1466) on that day. Since then, the market price of RIL has increased)
[The RIL rights issue is open for subscription from 20th May till 3rd June. Buyers will have to pay 25% of the price at the time of subscription, 25% in May 2021, and the rest in November 2021. Therefore, these shares will be traded as partly-paid shares until November 2021. After they are fully paid, they will be traded like other RIL shares.]
It is not necessary to avail of the right to buy. If a shareholder doesn’t want to buy the shares, it can either ignore his rights or sell his rights in the stock exchange. These right entitlement (RE) shares are traded like other securities in the stock market. These rights will be bought by investors interested in the rights issue.
[You may also read: Types of securities traded in financial markets]
(The SEBI had allowed trading of rights entitlement shares in the stock market in January 2020. RIL rights entitlement (RIL-RE) shares are the first to trade in the stock market. These RE shares will continue to be traded till 29th May)
The rights entitlement price is the difference between the underlying stock’s (RIL shares’) previous closing price and the rights issue price. Therefore, the price of RIL-PE is the difference between the closing price of RIL shares on 19th May (Rs.1408.15) and the rights issue price of Rs.1257. So, on 20th May (Wednesday), RIL’s Rights Entitlements began trading at ₹151.15.
On this day, due to excessive demand for the rights issue, RIL-RE closed at Rs 212 on NSE
This rights issue is a part of a strategy of RIL to become net debt-free by 2021. As of 2019, the net debt (after deducting cash in hand) of Reliance Industries Ltd (RIL) stood at 1.53 lakh crores.
Out of the total funds that will be raised (Rs.53215 crore), a substantial portion (Rs 39,755.08 crore) would go towards repayment of RIL’s debt.
The company has also made deals with Facebook, Silver Lake, Vista Equity Partners, General Atlantic in this regard. Here are the developments so far:
- April 23- Facebook buys a 9.99 % stake in Jio Platforms for Rs.43,600 crore. [You may also read: Facebook-Jio Deal: What is in it for both parties?]
- May 5: US private equity firm Silver Lake buys a 1.15 % stake for Rs.5,700 crore
- May 8: Vista Equity Partners buys a 2.32% stake for Rs.11,400 crore.
- May 18: PE firm General Atlantic buys a 1.34% stake for Rs.6,600 crore
- May 22: PE giant KKR buys a 2.32 % stake for Rs.11,400 crore
So, in total RIL has raised Rs.78,700 crore by selling its stake in Jio platforms to 5 investors in just a month. That too when the world economy is reeling under the impact of the coronavirus pandemic.
[You may also read- Why is the telecom sector in India under stress?]
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