The oil to telecom conglomerate while announcing its quarterly results ending March Fy20 approved a rights issue which is the first in 29 years to mop up Rs. 53,125 crore. So, here is a low down on whether or not shareholders of RIL should exercise their rights and subscribe to rights issue:
First we go any further on the company's rights issue offer. Here we will discuss
What is a Rights Issue?
Through the rights issue offer, the existing shareholders of the issuing company are given a dividend of subscription rights for buying additional securities in a company.
Factors one should look at while subscribing to the rights issue
1. One should first and foremost learn the aspect for why the company is coming up with the offer.
2. Price at which the offer is being made
3. Will the issue offer improve the future financial standing of the company, so as to gain reasonable returns from the investment over a period of time.
Details of the RIL's rights issue:
For its existing shareholders or shareholders who hold RIL shares as on the record date (yet to be announced), the rights issue will be offered in the ratio of 1:15 i.e. for every 15 shares of RIL an individual shareholder can get 1 rights issue share. Simply to say if an investor in the firm owns 150 shares, he or she can exercise the rights issue option and be entitled to receive 10 additional shares.
Interestingly it is not mandatory to opt for your right you can even let your right lapse on the issue.
Price for the rights issue share is fixed at Rs. 1257 per share. Notably, on the date of announcement of the rights issue, share of RIL closed at Rs. 1466 apiece.
25% of the amount shall have to be paid upfront for adding the rights issue share to one's portfolio.
And further reflecting confidence in the company, as per reports, Mukesh Ambani as well as other promoters will buy the full extent of their entitlement and also subscribe to any unsubscribed portion of the rights issue.
Objective of the RIL Rights Issue
Typically it is to pare down the company's debt which over the years piled up through the company's expansion of its retail and telecom divisions and company for the purpose is employing all possible tools.
In less than a month's time, the 3-high profile investment deals in the company's Jio platform is said to reduce the company's debt by 75%. As the conglomerate post the recent Vista Equity deal managed to accumulate Rs. 1.2 lakh crore.
Also, other rationale for gathering funds through the rights issue option can be a hedging bet due to a possible delay or call off of the Saudi Aramco deal.
Another objective of the rights issue offer is to augment the company's liquidity options.
Fairly priced at a steep discount of 24% in comparison to last closing price of Rs. 1561.80
As against the last closing price of RIL shares of Rs. 1561.80 on May 8, 2020, the rights issue price of Rs. 1257 apiece is highly attractive. And since the announcement of the rights issue on April 30, 2020, as though ideally remains the case the price of the stock has rallied by close to Rs. 100.
Should Investors Bet On Reliance Industries Rights Issue?
For existing investors, experts advice on exercising the rights and subscribe to the rights issue shares and remain put in the stock for at least 3 years. Also, it is seen as an opportunity wherein the investors can be part of the company's growth prospects in new and emerging domains including retail, telecom and digital.
But for others who do not own the shares, the current valuation do not seem attractive to invest in the stock of RIL after the recent run-up of as much as 80% since the stock market crash in March and there remains a high chance of correction in RIL's stock price post the rights issue offer.