RIL Rights Issue Investors Sitting On Profit Of 30% And More

New shares that Reliance Industries Ltd. issued, subsequent to a rights issue to raise capital, have surged since their debut. These are partly paid shares and yet they trade at a minor premium to ordinary shares. Though some shareholders may have already made much higher gains, ranging from 30% to 100%.

Billionaire Mukesh Ambani’s flagship intends to raise Rs 53,125 crore by issuing new shares in its biggest such rights issue in nearly three decades. These shares were listed on the exchanges Monday and closed 10% higher on the first day of trading. Despite falling on Wednesday, they continue to trade higher than the price investors paid.

The Math

RIL issued 42.26 crore new shares at Rs 1,257 apiece to shareholders that participated in the rights issue. The rights entitlement ratio was 1 new share for every 15 shares held. Shareholders are to pay for the new shares in installments over 18 months:

• Rs 314.25 apiece, or 25%, at the time of applying.
• 25% in May 2021
• The remaining 50% in November 2021.
• Shareholders have to pay Rs 942.75 in the next two tranches.

At the time of announcement, the RIL rights issue was priced at an over 10% discount to the then market price. The price has since risen due to a rush of investors in Jio Platforms, thus rendering the rights pricing even cheaper.

While existing shareholders could directly subscribe to the rights, investors who didn’t hold RIL shares had to first acquire rights entitlements so as to subscribe to the rights shares. Each entitlement traded between a low of Rs 152 and high of Rs 258.3 on the National Stock Exchange for 10 days before closing at Rs 222.

For ease of computation, let’s assume Rs 222 is the price that most non-shareholders paid for the entitlements—putting their cost per share at Rs 536. 3 (entitlement cost + first instalment). These partly paid shares on Wednesday closed at Rs 696.4—that’s a profit of 30% for those who purchased entitlements. For RIL shareholders who subscribed to the rights - the profit is close to 120%.

Shareholders will also have to pay Rs 942.75 more to get full ownership. Which means, the intrinsic value of each partly paid share is Rs 1,639.75. That’s a premium of nearly 2% over RIL’s June 17 closing share price.

Till this intrinsic value of the partly paid share remains higher than the current market price of the ordinary share, there will be interest in them. But once the value falls below the current market price of ordinary shares, it’s likely to trigger profit booking in partly paid shares.

Given the long-term nature of the investment, the shares are expected to move in sync with the ordinary shares and converge at the point of the third instalment.

The biggest trigger for RIL has been investments worth more than $14 billion in Jio Platforms Ltd., the holding company of the group’s telecom and digital businesses, to pare debt. And there’s still a plan to sell stakes in fibre and oil and chemicals units.

Morgan Stanley, while resuming coverage, assigned a 12-month target price of Rs 1,801, implying an upside of about 12%. To be sure, average of 12-month estimates complied by Bloomberg show little upside after the stock surged following multiple funding rounds.

Citing deleveraging as the key for re-rating, Morgan Stanley expects the company to cut net debt by half by the end of March. The next leg of asset monetisation driven by energy business will take next debt near zero, it said.

Amid optimism, foreign investors showed interest in the rights issue. Their ownership of RIL rose from 23.48% to 24.15% after the new shares were issued. The number of foreign portfolio investors holding stake in RIL increased from 1,318 as of March to 1,395.

The Ambani family’s own stake increased from 48.87% to 49.14% after the RIL rights issue.