Sucheta Dalal :How Reliance's big-bang demerger will unfold
Sucheta Dalal

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How Reliance's big-bang demerger will unfold  

December 27, 2005

In just around 20 days, India’s largest private sector company will formally spawn four new entities which will be separately listed on the major stock exchanges adding fresh stock to the depleting pool of investment opportunities in India’s overheated capital market.


These will be Reliance Capital Ventures, Reliance Communication Ventures, Reliance Energy Ventures and Global Fuel Management Services. Each Reliance shareholder will receive one share each of these four companies in the exact proportion of their shareholding, in addition to retaining their original Reliance Industries shares.


The capital structure of the new entities will be as follows:


• Reliance Capital Ventures (face value of Rs 5) with a paid-up capital of Rs 611.55 crore.


• Reliance Communication (face value of Rs 5) with a paid-up capital of Rs 611.55 crore.


• Reliance Energy Ventures (face value of Rs 10) with a paid-up capital of Rs 1223.10 crore.


• Global Fuel Management (face value of Rs 5) with a paid-up capital of Rs 1223.10 crore.


Each will initially have its capital split into 122.31 crore shares. However, it is expected that there will be a reverse merger of three of these entities into Reliance Capital Ltd., Reliance Infocomm Ltd and Reliance Energy Ltd., respectively, probably even before their listing. This is necessary to eliminate confusion with the existing companies in what is the Anil Ambani business empire.


Moreover, there will also be the question of re-rating the residual Reliance Industries, which will be significantly smaller after the de-merger process. The massive restructuring has already involved a great churn of equity within group entities as the family has sold and re-aligned group holdings.


The listing of the four entities in January 2006 will be an equally significant exercise that was set rolling on Friday when Reliance Industries applied to the two major bourses for listing their equity. Reliance Infocomm, the massive telecom company, tucked away under RIL will become the first company of that size to be listed on the stock exchanges without an Initial Public Offering (IPO). According to official sources, this requires some technical clearances that will probably come through in the next week.


Each of these companies will be listed in the derivatives segment straightaway since they all fit the criteria and each has capital in excess of Rs 500 crore and over 20 lakh shareholders.


Interestingly, the court order requires the Mukesh Ambani group to hand over the companies to Anil’s Anil Dhirubhai Ambani Enterprises (ADAE) after completing all the legal and listing formalities. Stock exchange sources say that the group has already applied for listing and each company may be listed in quick succession on and around January 18, 2006.


And what impact will the big-bang demerger have on the market? When a group as large as Reliance splits into five companies, it is bound to create turmoil and uncertainty in the market.


For instance, each of the four de-merged entities—Reliance Capital Ventures, Reliance Communication Ventures, Reliance Energy Ventures and the Global Fuel Management Services—will have to publish a comprehensive Information Memorandum that will give the first clear indication of the business prospects of each of these companies and such massive new information is bound to create trading volatility.


Hopefully, the residual Reliance Industries will also publish a similar Information Memorandum to clarify to investors what remains of the original company, with all the rapid expansion plans and fund-raising that has happened after the Ambani brothers announced their decision to split. The second element of uncertainty is over the impact of the demerger on various stock indices. The inclusion or otherwise of each of these entities in the leading indices is unclear, as is their future weightage in the Nifty and the Sensex. The fate of the existing outstanding derivative contracts in Reliance Industries is another grey area. Market sources expect a bout of frenzied trading in the residual Reliance shares until the book closure is complete.


The NSE has tried to cut the confusion in the coming days by refusing to announce March futures contracts in Reliance. Meanwhile, confusion continues to reign over the January and February contracts in Reliance Industries (pre-merger). These will see a great deal of churn and squaring up of the current outstanding position until January 17, 2006 when the stock exchanges would halt the derivatives in Reliance.


There are over 2.2 crore outstanding derivatives contracts in Reliance. The bulk of these will expire on Thursday, December 29. The rest will have to be liquidated by investors before January 17 or they will be compulsorily squared up by bourses.


However, on January 18, the stock exchanges will probably work out a price for the post-demerger residual Reliance shares and introduce new futures contracts. If and how this will happen has yet to be clarified by the two national bourses. In the short run, this situation will be open for a huge price ramp up (around January 18) in the cash segment, because the bulls can accumulate shares in the cash market, but bears will be restricted from selling in the absence of futures market.


The four demerged entities will remain in a no-delivery period until after the record date of January 25. Since January 26 is a holiday, the true market valuation of each of the newly listed companies will become clear only after January 27, when they begin trading for the next delivery period.


-- Sucheta Dalal