Reliance Jio & Reliance Retail Deal - Corporate Restructuring for Net Debt Free Company

" Goal of Debt Free Company "

• In the AGM of FY 2018-19, Mr. Mukesh Ambani had shared his goals of growing businesses through partnerships and achieving a Net Debt Free Balance Sheet by Mar’21 and this goal has been fulfilled well ahead of the timelines that had been set. In a short span of a few months, they have raised a record amount of capital and forged several new strategic partnerships. 

• Reliance raised Rs.1.52 lakh crore from global tech investors by stake selling in Jio Platforms Ltd and another Rs.13,300 crore through a rights issue. Taken together with sale of 49% stake in fuel retailing venture to BP Plc of UK for Rs.7,629 crore, the total fund raised is about of Rs.2 lakh crore. This fund raising process is mentioned hereunder:

A. Right Issues by RIL

• RIL's Rs.53,124 crore rights issue was India's largest-ever rights issue. It was also the world's largest rights issue by a non-financial institution in the last ten years. It ended last week with a 1.6 times subscription - a commitment exceeding Rs.84,000 crore.

• Right shares in the ratio of 1:15 were issued in Jun’20 at total value of Rs.1257 per share, of which 25% to be paid on application and balance in FY22. Total amount of Rs.13,300/- was received as application money (Rs.314.25/- per share was payable on application, of which Rs.2.50/- was towards face value and Rs.311.75/- towards the premium amount) 

• On the expanded post issue equity of 676.2 crore equity shares, the promoter group's stake now stands increased to 49.14%, from 48.87% at end-March 2020, according to the company's filing. 

B. Restructuring Process

 

i. Divestment in Jio Platform Limited (JPL)

RIL has raised fund for repaying its debts through a stake sale of about 33% in its subsidiary JPL to 13 foreign investors. The details of fresh issue of shares by JPL to various investors are as follows:

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The above shares are issued to various investors in the following manner:

• Facebook: Issued Equity shares @ Rs.488.34 per share & additionally issued 0.01% CCPS
• Google: Issued Equity shares @Rs.488.34 per share
• All other investors: Issued Equity shares @Rs.549.31 per share

It is interesting to note that the issue price for other investors of Rs.549.31, which is issued @12.5% premium in comparison to issue price for Facebook & Google. 

Now, let's come to the tax part of this deal:

For Jio Platforms, the deal has been structured in the following way:

1. RIL created its  WOS Jio Platforms Limited (JPL)
2. RIL transferred shares of Reliance Jio Infocomm. Ltd (RJIL) to JPL, apparently at cost value 
3. RIL gave its subsidiary, JPL a loan to buy RJIL shares from itself.
4. The loan was structured as Optionally Convertible Preference Shares (OCPS). 
5. Now, JPL issued fresh equity to the new investors through which it redeemed the OCPS held by RIL and the nature of transaction would be termed as paying back the loan.

Let's have look at the following for easy understanding of the above:

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Therefore, through the above process,

• RIL got repaid of its OCPS, thus reducing its own net-debt position significantly. The redemption of OCPS is essentially repayment of funds earlier infused by the RIL into JPL, which doesn’t attract tax since it was JPL that issued new shares, RIL will not have to pay tax on the Stake sale.

• JPL, too, would not have to pay tax though it issued shares at a tidy premium or even at a higher value than the fair value. The excess price charged as premium over the fair value is taxable u/s. 56(2)(viib) but provision of this sections are not applicable in case of NRI.

• Note:Transfer of shares to a 100% subsidiary is exempt from taxes.  However, under Section 47A they would pay taxes if there’s a profit, since Jio Platforms is now no longer 100% owned by Reliance.

ii. Divestment Reliance Retail Ventures Limited (RRVL) & Acquisition of Future Group’s Asset by RRVL:

A. Divestment in Reliance Retail Ventures Limited (RRVL):

Reliance Industries Ltd. now starts raising funds in its retail unit. In September 2020, it was announced that American investment firm Silver Lake has bought 1.75% Stake in RRVL for Rs.7,500 crore valuing the business at Rs.4.28 trillion. On 23 September, It was announced that KKR has bought 1.28% stake for Rs.5500 Crore valuing the Venture at Rs.4.34 trillion. The valuation details of RRVL along with shareholding pattern are as follows:

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This divestment could have been done by the company to fund the Future Group acquisition as stated in point B below.

B. Acquisition of Future Group’s Asset by RRVL:

• As a part of the acquisition, Firstly, the listed entities of Future Group – Future Retail Ltd., Future Lifestyle Fashions Ltd., Future Consumer Ltd., Future Supply Chain Solutions Ltd., and Future Market Networks Ltd. – and 13 private companies will merge into Future Enterprises

• Post that the Retail & Wholesale Undertaking, which also includes key formats such as Big Bazaar, fbb, Foodhall, Easyday, Nilgiris, Central, and Brand Factory is being transferred to Reliance Retail and Fashion Lifestyle Limited (RRFLL), a wholly-owned subsidiary of RRVL. The Logistics & Warehousing Undertaking is being transferred to RRVL directly. It will transfer for all its businesses to RIL for Rs.24,713 crore as going concerns on a slump sale basis, which includes cash consideration of Rs.5,653.55 crore and taking certain borrowings and current liabilities around Rs.19,000 crore.

• Further, RRFLL also proposes to invest Rs.1,200 crore in equity shares of FEL to acquire 6.09% of post-merger equity and Rs.400 crore in a preferential issue of equity warrants which, upon conversion and payment of balance 75% of the issue price (Rs.1200 crore), resulting in RRFLL acquiring further 7.05% of FEL.

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iii. Divestment in Oil to Chemical (O2C) Business:

• The mega deal is for Saudi Aramco’s $15 billion stake in the O2C business of RIL. It involves the at least 20% stake in a special purpose vehicle covering refining, petrochemicals and marketing. RIL board has already approved hiving-off its $75 billion O2C business into a separate entity.

• RIL has announced that it will spin off its oil-to-chemical business into a separate subsidiary by early 2021 after regulatory approvals. In the AGM of FY 2019-20, it has been shared that due to unforeseen circumstances in the energy market and the Covid-19 situation, the deal has not progressed as per the original timeline. Our equity requirements have already been met. Nevertheless, we at Reliance value our over two-decade long relationship with Saudi Aramco and are committed to a long-term partnership. We will approach NCLT with our proposal to spin off our O2C business into a separate subsidiary to facilitate this partnership opportunity. We expect to complete this process by early 2021.

So, it is all what we have understood from the giant mega deals entered or proposed by the none other than the "RELIANCE INDUSTRIES LIMITED", which always comes up with something new and bigger. Please share your views upon the same.

Advisory: Information relates to the law prevailing in the year of publication/ as indicated. The above article is only to enable public to have a quick and an easy understanding of this mega deal. Viewers are advised to ascertain the correct position/prevailing law before relying upon any document.

Thank You.