Riskless Reliance Industries Rights Investment Strategy

This is a Riskless Reliance Industries Rights Investment Strategy for those over 2.3 Million Shareholders already holding RIL shares.

It is not a recommendation to buy RIL cum rights 

It’s a no brainer yet I’m just penning a brief note because some have told me they hold Reliance but are skipping the Rights !

Don’t !

I’ll keep this short without going into the fundamentals of RIL Operations and future which in itself is quite another story

Adopt this simple Riskless Rights Investment Strategy as below if you’re concerned about what the future holds for Reliance and don’t wish to increase exposure by increasing your holdings through the Rights Issue ….well,if you’re deeply concerned you should not have been holding Reliance in the first place

This Strategy will reduce your Holding Cost of existing RIL shares by replacing 1:15 of your holding with the Rights entitled shares at a much lower Rs 1257/share to currently traded prices(see below)

Chronology

Rights Terms 

  • Issue of 42,26,26,894 equity shares of Face Value Rs 10
  • Issue Price is Rs 1257 including a Share Premium of Rs 1247
  • Issue Ratio is 1:15 or One Rights share for every 15 held
  • Issue Size is Rs 53124 crs

Computation of Ex-Rights Theoretical Price 

Reliance is traded cum rights at Rs 1575 to Rs 1585 range just over half an hour before closing today,Monday,May 11,2020.It will trade cum rights only till tomorrow

  • Value of 15 RIL shares currently at cum-rights price of  Rs 1585 per share=>Rs 23775
  • Price of 1 Rights Share as entitled =Rs 1257
  • Immediate Value of Holding post rights adjustment will then be 16 shares for=>Rs 23775+Rs 1257=>Rs 25032
  • Therefore ex-rights theoretical price is Rs 25032/16=> Rs 1564.50

 Riskless Rights Investment Strategy

For ease of understanding and computation I have used a hypothetical Holding of 15 shares based on a 1:15 Rights ratio. You can extrapolate this to your actual RIL Holding to compute how many Rights Shares are you entitled to and sell that quantity in Step 1 as below and apply for the entitled shares in Step 3 to replace those sold

  • Sell One Share immediately day after on ex-rights traded basis on Wednesday,May 13,2020 .Let’s assume this is @ Rs 1567 near the computation as above.You will thus be left with 14 shares
  • This will immediately lock in a beneficial  Rs 310 differential between Rights Issue Price and traded ex-rights Price and give you proceeds of Rs 1567
  • Subscribe for your entitled One Rights Share at Rs 1257 when the Rights Issue Opens and before it closes on  dates to be announced shortly.Payable on Application is only 25% or Rs 314.25 per share.You can thus use part of your proceeds to apply for the rights
  • Your Holding in RIL will return to 15 shares which you held originally
  • Your Holding Cost for your existing 15 shares will reduce by Rs 310/15 = Rs 20.67 per share.Have not considered the Tax Payable on the gains made on sale of the One share as above.This would be marginal

Promoters ,Ambanis who hold 50.03% of the Equity as on December 31,2019 have already said they will be participating in the Rights and will also subscribe to any under-subscribed portion.This of course serves as a reassurance but why should you let them take this advantage by transferring your risk-less differential to them if you opt wrongly to skip the Rights

You’re welcome to connect with me on [email protected] or even on my mobile +91-9820162597 if you need any further clarity on this

Cheers,

Gaurav

6 thoughts on “Riskless Reliance Industries Rights Investment Strategy

  1. Thank you Sir ….First time coming across such a beautiful strategy to be adopted in Right issue…
    Earlier I decided to skip… But not now after reading this and will not allow Ambani to take advantage by skipping the rights.

  2. Sounds like complete bullshit to me. You have missed considering the increase in total number of shares of the company. So by just owning same number of shares post right issue, you will own lesser % of the company. Anybody who buys it pre-right now, will be worse off, if he doesnt subscribe to the rights issue, simply because what you have bought for 1575, others are getting for 1257.

    1. Ouch! strong words… of course Sid, post rights the equity increases and your holding as a % of post issue equity goes down a notch if you decide to keep the same level of holding you had before the issue by skipping the rights or adopting what I have suggested …the point,as pointed out is simply that if you wish not to increase your holding and exposure any further the least you can do is adopt the strategy I have suggested so you can reduce your holding cost…every Rupee counts even if the Rights Ratio is 1:15 and issue price being Rs 1257 makes very little difference between cum rights and ex rights theoretical price…if you maintain your holding at 15 shares what difference will it make if you’re holding 0.000000237 % of the Pre Rights Equityof 633.94 cr shares or 0.000000222% of the post rights equity of 676.20 crs shares at the end of it!….I don’t consider this situation as material at all…I have also spelled out that this is not a recommendation to buy RIL cum rights but all eligible shareholders,both new who’ve bought cum rights and the older ones, on Record Date of May 14,2020 must not skip the Rights…new ones will of course take the rights for that’s what they may have bought for but it’s the older shareholders of the huge body of 2.3 million that may be planning to skip….they should not…by taking the rights you will maintain your % of stake and also reduce your holding cost as outlined…and the risk-less strategy outlined is for those who want to keep their holding at the same level ,lock in the differential right away and not take a chance or worry about any possible significant fall ex rights in the price of RIL, and reduce their holding cost for ultimately the same holding level they held pre rights and which would mean not minding diluting their stake just that wee bit…this should be clear enough,….appreciate your visiting the blog and your voicing your view…Cheers,Gaurav

  3. Buddy – owning number os shares is meaningless, you effectively have to look at what % of company you own. While in retail we all care a lot about # of shares, its fairly meaningless actually. Effectively you are saying the same thing that if you own reliance, better subscribe to right issue – otherwise others will get cheaper shares as compared to you. However there is no reason to buy reliance (if you dont already own) and play this strategy to gain something (which is what the title suggest).

    1. Hey Sid,Let it rest…all have got the point made in the blogpost…it’s not a recommendation to buy RIL, only not to skip the rights if you did not want to increase your RIL holdings for the rights facilitates a riskless strategy as outlined in reducing your holding cost on pre rights Holdings…even today at ex-rights Rs 1480 ,the differential is Rs 223 and if locked in this reduces your holding cost by Rs 13.90 if you adopt the strategy in the blogpost…the differential can increase,decrease or even evaporate and a shareholder may not want to take the chance… Cheers,Gaurav

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