The valuation process to arrive at the fair value of the RE involves several assumptions
Mumbai: Shares of Reliance Industries – Rights Entitlement (RILNSE 1.06 % – RE) climbed 40% on debut to widen the spread between the market price and rights issue of each Reliance Industries share, telling potential long-term investors that they should buy into India’s most valuable company – especially because of the lower cash outgo immediately.
RIL-RE rose to ₹212 at the end of Wednesday’s trading on the NSE, which amounted to ₹32 higher than the spread between RIL market price of ₹1,437.40 and the rights issue price of ₹1,257. The rights issue is part of the sequenced deleveraging programme that seeks to extinguish about ₹1.60 lakh crore of net debt on the balance sheet.
About 32 million shares of RIL-RE were traded on NSE and BSE, compared with 27 million shares of the parent RIL. Delivery of RIL-RE is a must, which means 32 million rights out of 422.6 million offered were subscribed on the first day.
While global depository receipts (GDR) and exchange traded funds (ETF) were the major sellers of RIL-RE on Wednesday, global long-only funds were the major buyers, according to market participants. Global ETFs generally do not hold partly paid shares.
The market value of the rights issue share on Wednesday was ₹1,469 (₹1,257 plus ₹212). But investors with a long-term view on Reliance Industries stock would now have to pay only ₹526.25 (₹314.25 plus ₹212) to subscribe the rights issue shares, which would save about ₹100 per share, if considered a funding cost of 10% per annum.
This is first time in India that RE shares were allowed to trade after Sebi introduced this concept in January.
If an investor buys RIL-RE shares on or before May 29, s/he can claim the rights issue shares by paying the first instalment of 25% (₹314.25) on 3 June. Another 25% will be paid by the investor in May 2021 and the balance 50% i.e., ₹628.50 per share will be paid in November 2021 on-call by the company.
The valuation process to arrive at the fair value of the RE involves several assumptions. Theoretically, the intrinsic value of a rights issue equals the difference between the stock’s current market price and the price of the right issue. Based on the Wednesday’s closing stock price of RIL and the rights issue price of ₹1,257, the intrinsic value is ₹180.
Typically, REs trade at discount to the intrinsic value. However, RIL’s RE trades at a premium thanks to substantial interest from hedge funds and special situation funds. Market participants with long-term outlook will benefit from the staggered payment terms of the rights issue.
Reliance shareholders as on 14 May will receive one rights entitlement (RE) in their demat accounts for every 15 equity shares held by them. The REs will be in the form of temporary demat securities which will lapse if not renounced or exercised. Investors should renounce the REs on or before May 29.
Retail investors will be able to buy or sell the REs between 20 May and 29 May, but trade has to be settled on a trade-to-trade basis and not on intra-day basis. Those with the REs on June 2 will be able to subscribe to the rights shares at the issue price of ₹1,257.
Investors may renounce the REs credited to their respective demat accounts by way of an off-market transfer through a depository participant. Shareholders with less than 15 shares will be given preferential allotment if they apply for one rights share subject to availability.