RIL -- Preferrential Allotment, Hiving of Off Shore Business, Merger with IPCL, Dividend

Over a period of last few months a lot of things have been happening in Reliance. The first among it was Hiving off the Off Shore Business. As stated in the papers this can be to derisk the business politically. However how would have they decided the timing is an important question. Is is to Unlock value and for a future listing at Markets Abroad!! Lately a lot of indian corporates have been doing so & it can be natural for reliance too to follow the footsteps.

Now due to hiving of the Assets the Parent Co loses a lot of potential nos on the balance sheet. To manage it it IPCL is to be merged with the parent. This will ensure good balance sheet as well.

Also reliance is planning a preferrential allotment. This can be to Capitalize RIL for its retail venture. To arrange the money reliance opted to distribute dividends for both RIL & IPCL. This ensured it recieved 880 crores out of it. This money will potentially be used for the preferrential allotment.

One would be tempted to ask why such a complicated set of actions to invest the money in Retail Operations. RIL could have directly invested in RRL (Reliance Retail Ltd).

To answer this lets compare the two scenarios. The series of steps ensures that

1. Promoters get an option to increase their stake in RIL.
2. Since promoters now have a higher stake in RIL, they directly get higher stake in RRL.
3. The promoters got to increase the stake while aam reliance shareholder got money
4. The onus of buying shares from the stock market to maintain the share lies with the shareholder, who may not do so.
5.If and when a set of shareholders buy from stock markets to maintain their shareholding, then the share price gets support.
6. The free float decreases, thereby the chances of hostile takeover are reduced.

Thus a win-win game for all the stakeholders.

This all will help reliance to get a lot of Cheap money to fund its ambitions plans.

Since it has high promotor holding the chances of conflict among shareholders for a particular decision is low, so more investor Confidence.

Good stock price ensures better rating of the promotors and hence better financing options.