By the time the planned restructuring of Reliance Jio is completed, the company will be almost debt free. For a long time, investors in RIL have been worried as to how the debt of Jio will be handled and how the capital investment of $30 billion will be amortized. Now, there appear to be some answers to this question. Here is how RIL plans to go about it.
Forming a digital subsidiary
The first step in this case will be that RIL will form a digital subsidiary with a capital infusion of Rs.108,000 crore. The subsidiary, in turn, will acquire RIL’s equity invested in Reliance Jio for Rs.65,000 crore. The Rs.108,000 crore that RIL will invest in the digital subsidiary will be via issue of optionally convertible preference shares (OCPS). Once the deal is completed, Reliance Jio will become completely debt free. In fact, the only debt that will be left in the books of Jio will be the spectrum related liabilities payable to the government. This deal needs to be seen in the light of the recent efforts to transfer Jio assets to an INVIT structure back in March 2019. Back then, Jio had shifted assets like digital connectivity platform, tower assets and other infrastructure assets worth Rs.125,000 crore to an infrastructure investment trust (INVIT) so as to make the company asset light. Now this latest move will also make the telecom and digital business extremely light on debt and on assets. Jio will have a balance sheet of just Rs.2.40 trillion.
Good value proposition
As the company announced in its press release, this was likely to turn out to be a very good value proposition for the existing shareholders of RIL as well as potential investors in its new business ventures. Globally, most strategic and financial investors prefer to invest in digital businesses that are light on debt and also on asset size. This ensures rapid growth in ROI without making any compromises on the financial stability of the business. It is this combination that RIL will be betting on to make Jio deliver value by getting long term investors to participate in the Indian digital ecosystem at an early stage. That would surely be a compelling choice for a lot of potential investors.
Future is now
But more than valuations and stake sale, this is an internal restructuring with a view to bet on the big franchises of the future. For the group, the big growth in profits and valuations are already coming from the digital and the retail businesses. This new structure will ensure that most of the debt remains with the core oil and petchem business which continues to derive benefits from the digital foray. At the same time, the new age digital businesses are allowed to grow in an unfettered way. That would certainly make sense to the existing and future investors of Reliance Industries. It is over to the future! ©