The rights issue offers an opportunity for existing shareholders to reap the benefits from RIL’s new and emerging businesses such as digital, telecom and retail business.
A company can raise the requisite capital in the form of debt or equity. Initial public offering (IPO) is one of the popular mechanism through which companies raise equity capital. But, under rights issue a company makes an offer only to its existing shareholders to buy additional new equity shares in their company, generally at a discount to the market price. In this context, let us look at the recently announced Reliance Industries Ltd (RIL) mega rights issue offer.
Mechanics behind rights issue offer
For the proposed rights issue of RIL shares, only those who own the shares as on the record date will be eligible to subscribe. Accordingly, every eligible shareholder is entitled to apply for one share for every 15 shares of the company he holds. Thus, one share will be offered at Rs 1,257, which is 14% discount to the closing price on April 30, 2020. In this manner, RIL proposed to raise Rs 53,125 crore and this would be first of its kind in RIL history in three decades.
The last time the company reached for public funds was in 1991 when it issued secured redeemable partly convertible debentures. Motivation The major motivation for such a mega rights issue by the company is to become a debt free or zero-net debt company by next year. RIL’s net debt as of March 2020 stood at Rs 1,61,035 crore. Sometime ago, with an intention to reduce debt, RIL struck a deal to offload its stake in its refinery business to Saudi Aramco (Saudi Arabian Oil Company) which is stalled by legal proceedings. The process of raising funds through rights issue offer helps the company to raise funds without the involvement of many intermediaries and the associated fees in comparison to follow on public offer (FPO).
Further, apart from its traditional business, RIL is likely to aggressively bet on its retail business, digital and telecom. In this direction, last week Facebook Inc stated that it would invest around Rs 43,600 crore in Jio Planforms Ltd, which is RIL’s telecom and technology division, for a 10% stake. Commitment by promoters Generally, rights issue is a positive signal from the promoter about its confidence level in the business. The promoters and promoter group, predominantly the Ambani family, holds 50.03 % stake in RIL.
The promoters will subscribe fully to the rights issue to the extent of their holdings and will also take up any unsubscribed shares in the issue. So, such a huge equity infusion by the promoter group is a clear positive signal regarding the commitment of the promoters and their confidence in the future prospects of the company. Investors should also note that the company board approved a dividend of Rs 6.50 per equity share for financial year 2019-20.
Thus, in this case, the rights issue presents a very good opportunity for existing shareholders to reap the benefits from value unlocking from the new and emerging businesses such as digital, telecom and retail business over the next few years. Existing shareholders can also have the liberty to ignore / forego their rights.
But in that case, their existing shareholding will be diluted after the completion of rights issue offer.Investors should always exercise caution and assess the motivation of the company for offering rights issues, promoters’ commitment, future prospects, etc., while subscribing for the rights issue offer.
The writer is a professor of finance & accounting, IIM Tiruchirappalli. Views expressed are personal.