Business Trust structure allows returns to unit holders from operating cash flows

RCom's plans to list its FLAG undersea unit as a business trust (BT) in Singapore might be to the detriment of the company's shareholders in India, said analysts.

RCom is filing with SGX (Singapore stock exchange) to raise around $1.5 billion (Rs 7,500 crore) by listing FLAG as a BT, said sources. It will most likely place 75 per cent of FLAG's equity through the offering.

While unit holders of the BT might benefit from the dividend they get, this will be at the expense of RCom's shareholders in India.

The reason is that the BT structure allows for payment of returns to unit holders out of operating cash flows. So, even if the company does not have accounting profits, it can still pay the unit holders of its BT.

Steady returns

Like rentals from leased property, cash flows from leasing FLAG's 65,000-km submarine cable network can give steady returns to the BT's unit holders, said analysts. RCom shareholders, meanwhile, could see their company's income steadily deplete as a chunk of the company's revenues flow to these Trust investors.

The company's overseas business contributes to 35 per cent of RCom's consolidated EBITDA.

This is relevant because RCom has been reporting declining profits and has debt to the tune of around Rs 35,000 crore.

(FLAG consists of the undersea cable assets of the company and is 100 per cent owned by Reliance Globalcom. The latter is in turn a wholly owned subsidiary of RCom).

BUSINESS TRUST

A business trust (BT) is a hybrid structure with features of a company as well as a unit trust.

Investors get units and not shares. The trust is run by a trustee manager.

Apart from making distributions out of cash flows, the other advantages are that there are less restrictions on gearing for BTs listed in Singapore. This means there can be a greater debt to equity ratio.

Business trusts with offshore infrastructure assets (such as FLAG with its global network) may also get certain tax incentives, stamp duty and withholding tax benefits in Singapore.

This money, as well as money from stake sale in its tower unit (which is imminent), could help RCom wipe off some of its huge debt, said analysts.

RCom's shares rose by 1.5 per cent on Tuesday to close at Rs 91.25 each.

(This article was published on March 20, 2012)
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