MUMBAI : Reliance Industries Ltd (RIL) is likely to lean on its promoter to facilitate a large dose of capital infusion through a rights issue and attain its goal of becoming a zero net debt company by March next year.
Billionaire Mukesh Ambani-controlled RIL’s plan to wipe out its massive debt are turning to look ambitious due to the uncertainty around a deal to sell stake in its refining business to Saudi Aramco.
With a net debt of ₹1.53 trillion at the end of December 2019, and the target to become net debt free drawing close, RIL late on Monday evening said it is considering raising funds by selling shares to existing investors through a rights issue.
As part of the debt-reduction plan, RIL bagged an investment of ₹43,574 crore from Facebook Inc. last week in its subsidiary Jio Platforms Ltd. That leaves RIL to raise another ₹1.1 trillion to meet its aim.
Analysts said a rights issue may have become imperative for RIL, given its proposed $15 billion deal with Aramco appears to be in jeopardy, free cash flows impacted due to the covid-19 lockdown and the crash in crude oil prices.
“At least 50% of the issue will be subscribed by RIL’s promoter And being a company that values its equity a lot, the size of the issue would be substantial. It shows how serious RIL is about debt reduction," an analyst with a foreign brokerage said on condition of anonymity.
Rights issue is an invitation to existing shareholders to buy additional new shares of a company.
According to Morgan Stanley, the rights issue could range between $2 billion and $13 billion. RIL has not mentioned the size of the proposed rights issue.
“While a rights issue, if successful, could be slightly earnings accretive under various scenarios, it would also reduce investor focus on asset divestments," Morgan Stanley said in a report on Tuesday. “We calculate that a potential rights issue size equivalent to 2-12% of equity if done at a 5-20% discount to current market price, would be earnings accretive by 0.1-2.6% as it lowers debt (including liabilities) of $41 billion (post Facebook deal) further by 4.7%-34%," Morgan Stanley added.
The largest rights issues so far in the Indian stock markets came in 2019 when both Bharti Airtel Ltd and Vodafone Idea Ltd raised around ₹25,000 crore each.
Capital markets experts said a rights issue is a good alternative for raising capital in the current market conditions, which also allows promoters to avoid dilution of their shareholdings.“In the current environment, given pricing requirements for QIPs and preferential issues being tied up to the weekly average stock prices, a rights issue is more commercially attractive as it does not come with any attendant pricing restrictions," said Arka Mookerjee, partner at law firm JSA.
“Also, given the current investment scenario, existing shareholders may be the most reliable source of equity funding in a time-bound manner, with traditional investors preferring to wait out the current turbulence."
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