[Analysis] Reliance Industries Limited Right Issue

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Over the past few days, I have been receiving many requests across various mediums to do a post on the Rights Issue of Reliance Industries. After getting a lot of requests, I did some thorough research on this rights issue, and today I am going to share all the facts in a comprehensive manner. Before, I talk about the rights issue. Let us see why a company gets listed or issues shares to the general public.

Why companies issues shares?

• To raise capital for business expansion or diversification.
• To repay their existing loan and debts.
• To provide an exit option for the initial investors.

Why people invest in the shares of these companies?

• To create wealth.
• To get dividends.
• To get ownership (proportional to the number of shares owned) of that company.

Methods of raising capital

• IPO: IPO Stands for Initial Public Offer. An unlisted company uses this method to issue new shares to the public. The price band is decided by the company.
• FPO: FPO stands for Follow-on Public Offer. Only a listed company can use this method to raise further capital by issuing new shares to the public. Both new and existing shareholders can bid in FPO. Prices are generally lower than the market price. The price band is decided by the company.
• Rights Issue: Companies can raise capital through Rights Issue. In this method, only existing shareholders are allowed to purchase new shares. New Shares are issued in the form of a:b, it means for every ‘b’ number of shares held by the shareholder, ‘a’ number of new shares will be offered.
• OFS: OFS stands for Offer For Sale. Promoters of a company generally use this method to dilute their stake in a company. Old shares are issued to new and existing shareholders. A floor price is set by the company. People need to place their bid above the floor price.

Reliance Industries Limited Right Issue

India’s most valuable company (by market capitalization) has launched India’s biggest ever right issue of ₹ 53,125 crores. This is in line with Reliance Industries Limited’s (RIL) mission to become debt-free by 2021. The rights issue has been opened on May 20 and it will close on June 3, 2020.

At 1:15 ratio, existing shareholders can subscribe to equity share for every fifteen shares held, at ₹ 1,257 per share of face valve ₹10, a 14.31 per cent discount to the closing price of April 30, 2020. Existing shareholders can subscribe by paying only 25 per cent of ₹ 1,257. The remaining balance will have to be paid in two instalments – 25 per cent by May 2021, and the remaining 50 per cent by November 2021. Eligible shareholders can:

• Subscribe to the right issue as per the payment plan announced by the money.
• Can ignore it and the temporary security will be removed from the account.
• Can sell their right entitlement in the stock exchange. For the first time, Right Entitlement (RE) shares are being traded in the exchange.

If you purchase RIL Right Entitlement Shares

• Case 1: You are simply purchasing the share of RIL by paying the price of RIL Entitlement Shares (~ ₹215 to ₹220 per share) and 25% of the offer price (~₹ 315) now. Next 25% before May 2021 and remaining 50% by November 2021. Assuming the price of the share will move upwards, your cost price will not change – it will remain RIL Right Entitlement price + ₹ 1,257 (~ ₹ 1,460 to ₹ 1,500). In this case, you can take advantage of the instalment plan, and you may put the money to work somewhere else. You can sell the share at any time even at partly paid state.

• Case 2: In the month of March 2020, RIL came to down to ₹ 875. After purchasing the right entitlement share, you see that the price of RIL starts falling and comes down to ₹ 1,000. In this case, demand for the RE will drastically fall and the price will start also coming day. Under such circumstances, you’ll find the regular share of RIL to be better than RIL-RE share.

Have any questions related to the RIL Rights Issue? Feel free to ask them in the comment section.