The financial engineering behind the Great Jio Fund-raise
Business Line
July 21, 2020
The financial engineering
behind the Great Jio Fund-raise
THE WIDER ANGLE Reliance
wants to be a tech giant, but Jio faces many rivals
Why rivals Google and FB
have converged on Jio
Essentially, stake sales in
Jio Platforms seem to be structured as a transfer of shares from RIL
Reliance Industries’ (RIL)
fund-raising blitz over the past three months has fetched it more than
₹1.5-lakh-crore by divesting nearly 33 per cent stake in Jio Platforms to an
eclectic mix of 13 investors. With Google’s investment, the last piece of the
Great Jio Fund-raise fell in place and what the picture reveals is a
meticulously planned financial engineering exercise that only RIL could have
drawn up.
Groundwork
The groundwork for the mega
stake-sale was set into motion in the latter part of the last year — when Jio
Platforms was established as a holding company to house all of RIL’s digital
businesses.
This included the flagship
Reliance Jio Infocomm (RJio) that has rapidly risen to a position of dominance
in the country’s telecom sector. RIL set up Jio Platforms as a wholly-owned
subsidiary, which, in turn, held full or majority stakes in several digital
businesses including RJio (see chart). So, when investors bought a part of Jio
Platforms, they got a part of RIL’s entire digital business as well.
The key objective behind
this two-layer structure was to set up an integrated, digital business entity
that was light on debt — one that could command top-dollar valuations, similar
to global tech majors. RIL had invested big money in its digital businesses, a
good part through debt, and it needed handsome payback to de-leverage its
books.
Capital re-organisation
The ingenious capital
re-organisation was also a complex one involving RIL, Jio Platforms and RJio. While
there are many scenes in the act, here’s the key one.
RIL took over a chunk (about
₹1-lakh crore) of RJio’s debt, but along with it, RJio also gave RIL an equal
amount of consideration, read cash. Nice, but how did RJio get the cash? That
came from Jio Platforms, when it subscribed to the OCPS (Optionally Convertible
Preference Shares) issued by RJio.
OCPS are quasi-equity
instruments. But how did Jio Platforms get the cash to subscribe to the OCPS of
RJio? Well, that came from RIL when it subscribed to the OCPS issued by Jio
Platforms. Net-net, RIL used its cash to finance Jio Platforms, which used the
cash to finance RJio that, in turn, transferred the cash back along with the
debt to RIL. So, effectively RIL took over the chunk of the RJio debt and got
back its own cash, with Jio Platforms being the go-between (see chart).
Stake sales
Now, to monetise its digital
businesses and also pay down the increased debt on its books, RIL decided to
sell stakes in Jio Platforms. The sale kicked off in late April this year when
Facebook came on board, buying 9.99 per cent in Jio Platforms for ₹43,574
crore. Of this, Jio Platforms will retain ₹14,976 crore and the balance ₹28,598
crore will go towards redeeming the OCPS held by RIL in Jio Platforms.
The belief is that in the
subsequent stake sales, too, a portion —10 per cent — has been retained in Jio
Platforms, while the rest has gone to RIL by redeeming the OCPS held by it in
Jio Platforms.
Motilal Oswal, in its
reports on RIL, says, “Similar to the previous deals, Jio Platforms is expected
to retain 10 per cent of the cash and the rest would be transferred to its
parent company, which could be subsequently used for deleveraging.”
BusinessLine has not been able to confirm this.
OCPS conversion to equity
Interestingly, the
shareholding of the previous investors in Jio Platforms did not get diluted
when new investors came in; only the shareholding of RIL in Jio Platforms kept
reducing.
Jio Platform’s total equity
as of March 2020 comprised equity share capital (₹4,961 crore) plus other
equity (₹1,77,064 crore). This ‘other equity’ is OCPS issued by Jio Platforms
to RIL.
When the many investors
bought stake in Jio Platforms, they were given equity 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 happen
when shares were issued to new investors. The amount of OCPS reduced while the
equity share capital increased, keeping the total equity the same.
Essentially, the stake sales
seem to have been structured as a transfer of shares from RIL.
But it is unclear how a
portion of the cash from the stake sales was retained at Jio Platforms. In case
of transfer of shares, the entire sale proceeds should go to the selling
shareholder, in this case RIL.
But some money being
retained at Jio Platforms suggests a few possibilities — Jio Platforms issuing
to investors its own treasury shares (if it had them), or Jio Platforms getting
funds from RIL in the form of debt or redeemable preference shares.
We have to wait for the next
Annual Report of Reliance Industries or an IPO of Jio Platforms, whichever
happens earlier, for clarity on this.
Data access to public
shareholders
The marquee investors
line-up in unlisted Jio Platforms would likely have been given access to the
company’s data room. Is the company also obliged to provide such access to
public shareholders of RIL, if they demand it - after all, RIL’s shareholders
hold shares, even if indirectly, in Jio Platforms too.
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 the annual returns,
financial statements, statutory registers and director details.
It is an entirely different
situation when a public company is seeking investment into its private
subsidiary and is sharing information on the subsidiary with a potential
investor. The potential investor signs a non-disclosure agreement prior to
gaining access to the data room as part of the due diligence. The decision to
disclose this information and the extent of such disclosure is entirely the
call of the investee company (and indirectly its holding company). Other
shareholders of the holding company have no legal right to such confidential
information, except to the extent allowed by law.”
Eshwar Sabapathy, the
Managing Partner at corporate and IPR law firm Eshwars, concurs and says, “Shareholders
of a listed company will have access to the unlisted subsidiaries’ financials
through the public sources. What the shareholders will not have access to is
books of accounts, and whether in due diligence, the prospective investor would
have been given access to the books of accounts is not known.”
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