The financial engineering behind the Great Jio Fund-raise

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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