The financial engineering behind the big Jio fundraiser

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Reliance Industries (RIL) fundraising campaign over the past three months has raised over ₹1.5 lakh-crore by selling almost 33% stake in Jio Platforms to an eclectic mix of 13 investors. With Google’s investment, the final piece of the Great Jio fundraiser fell into place and what the image reveals was a meticulously planned exercise in financial engineering that only RIL could have engineered.

Preparatory work

The groundwork for the mega stake sale was laid late last year – when Jio Platforms was set up as a holding company to house all of RIL’s digital business.

This included the flagship Reliance Jio Infocomm (RJio) which quickly achieved a dominant position in the country’s telecommunications sector. RIL established Jio Platforms as a wholly-owned subsidiary, which in turn held full or majority stakes in several digital businesses, including RJio (
see the table ). So when investors bought part of Jio Platforms, they also got part of RIL’s entire digital business.

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The main objective behind this two-tier structure was to set up an integrated, low-leverage digital business entity – one that could achieve high valuations, similar to global tech majors. RIL had invested a lot of money in his digital business, much of it through debt, and he needed a good return on investment to deleverage his books.

Capital reorganization

The ingenious capital reorganization was also complex involving RIL, Jio Platforms and RJio. Although there are many scenes in the act, here is the key.

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RIL took over a portion (about ₹1 crore lakh) of RJio’s debt, but along with it, RJio also gave RIL an equal consideration, in cash. Good, but how did RJio get the money? This came from Jio Platforms, when it subscribed to OCPS (Optionally Convertible Preference Shares) issued by RJio.

OCPS are quasi-equity instruments. But how did Jio Platforms get the money to subscribe to RJio’s OCPS? Well, it came from RIL when he subscribed to the OCPS issued by Jio Platforms. Net-net, RIL used its cash to fund Jio Platforms, which used the cash to fund RJio which in turn transferred the cash back along with the debt to RIL. So RIL effectively took over most of the RJio debt and got its own money back, with Jio Platforms being the middleman (see chart).

Stake sales

Now, to monetize its digital business and also repay the increased debt on its books, RIL has decided to sell stakes in Jio Platforms. The sale kicked off at the end of April this year when Facebook came on board buying 9.99% of Jio platforms for ₹43,574 crore. Of this amount, Jio Platforms will retain ₹14,976 crore and the balance of ₹28,598 crore will go to buyout the OCPS held by RIL in Jio Platforms.

The belief is that in subsequent stake sales, a portion – 10% – was retained in Jio Platforms, while the remainder went to RIL by buying out the OCPS it held in Jio Platforms.

Motilal Oswal, in his reports on RIL, says, “Similar to previous deals, Jio Platforms is expected to retain 10% of the cash and the rest will be transferred to its parent company, which could then be used for deleveraging.”
Activity area was unable to confirm this.

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Conversion of OCPS into equity

Interestingly, previous investors’ stake in Jio Platforms was not diluted when new investors arrived; only RIL’s stake in Jio Platforms continued to decline.

Jio Platform’s total capital as of March 2020 included share capital (₹4,961 crore) plus other equity (₹1,77,064 crore). These “Other Equity” are OCPS issued by Jio Platforms to RIL.

When the many investors bought a stake in Jio Platforms, they received shares by converting the OCPS held by RIL. Due to this adjustment, the total share capital base did not increase and dilution of previous shareholders (except RIL) did not occur when issuing shares to new investors. The amount of OCPS has decreased while share capital has increased, keeping total equity at the same level.

Essentially, the share sales appear to have been structured as a transfer of shares from RIL.

But it’s unclear how some of the money from stake sales was kept at Jio Platforms. In the event of a transfer of shares, the entire sale proceeds must revert to the selling shareholder, in this case RIL.

But some of the money kept at Jio Platforms suggests a few possibilities – Jio Platforms issuing investors its own treasury shares (if it had any), or Jio Platforms obtaining funds from RIL in the form of debt or redeemable preferred stock. .

We have to wait for the next annual report from Reliance Industries or an IPO from Jio Platforms, whichever comes first, for more clarity on this.

Access to public shareholder data

The range of big-name investors in unlisted Jio platforms would likely have had access to the company’s data room. Is the company also obligated to provide such access to RIL’s public shareholders, if they so request – after all, RIL’s shareholders also own shares, albeit indirectly, in Jio Platforms.

Not necessarily, say legal experts. Ramesh K. Vaidyanathan, Managing Partner, Advaya Legal, says, “All shareholders of an Indian company, both private and public, have certain information rights under the law, including the right to inspect annual reports, financial statements, statutory records and directors’ contact details.

It is quite different when a public company seeks to invest in its private subsidiary and shares information about the subsidiary with a potential investor. The potential investor signs a non-disclosure agreement before being granted access to the data room for due diligence. The decision to disclose such information and the extent of such disclosure rests entirely with the issuing company (and indirectly with its holding company). Other shareholders of the holding company have no legal right to such confidential information, except as permitted by law.

Eshwar Sabapathy, the managing partner of corporate law firm and DPI Eshwars, agrees and says: “Shareholders of a listed company will have access to financial data of unlisted subsidiaries through public sources. . What shareholders will not have access to are the books of accounts, and it is unclear whether, as part of due diligence, the potential investor would have had access to the books of accounts.

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