RIL's Rs 53,124-cr rights: Partly paid premium shrinks as call date nears

Analysts advice investors to make switch to fully-paid shares

The price of Reliance Industries’ (RIL’s) partly-paid (PP) and fully-paid (FP) shares has started to converge ahead of the first call payment later this month.

On Tuesday, the partly paid shares-–issued last year during its Rs 53,124-crore rights issue--traded at a premium of just Rs 16.3. In November 2020, the premium was as much as Rs 130.

Earlier this month, RIL announced the details for the first call payment. Under this, holders of RIL PP, as on the record date of May 12, will have to pay their second installment of Rs 314.25 per share to the company by May 31.

At the time of rights issue in May 2020, rights issue subscribers had paid Rs 314.25 for one PP of face value Rs 2.5. The final call of Rs 628.5 per share –for remaining face value of Rs 5—will have to be paid later in November. Following this, the PP shares will cease to exist as they will get converted into fully-paid shares.

Analysts say narrowing premiums between PP and FP indicates that large investors are switching from PP to FP.

“We recommend long-terms shareholders to gradually start switching from partly paid-up to ordinary shares,” says Abhilash Pagaria, an analyst at Edelweiss Securities. “As per our expectation the premium has now come down to just Rs 16 and by October the premium will vanish to par or even move to slight discount.”

So why were investors paying a huge premium in the first place to buy RIL PP shares?

“When company issued these shares, the first call date was 12 months away and the final call date was 18 months away. So holders of PP were locking in the price of Rs 1,257 (rights issue price) to be paid over 18 months. The premium was technically the interest they were paying to make the staggered payment. Now we are seeing a time value erosion as the call dates near,” explained an analyst.

A large section of investors is switching to FP as it offers better liquidity, say experts.

However, market players believe the PP shares won’t slip into a huge discount as it will create arbitrage opportunities for investors given the price of FP is currently more than 50 per cent above the rights issue price.

The premium will be a function of how RIL shares do in the near-term.

Shares of the Mukesh Ambani-led company have underperformed this year following a significant jump in 2020.

RIL ordinary shares have come off 16 per cent from their all-time highs on September 16, 2020. PP, being the high-beta version of the ordinary shares, have come off 29 per cent during this period.

Market players say if investors who are hopeful that RIL share price will do well between now and November can even take exposure through the PP route if the premium stays low as they will be able to buy more PP shares with the same amount.

Morgan Stanley in a note on Monday issued an ‘overweight’ rating on the stock with a price target of Rs 2,262.

“We believe earnings torque from a multi-year upcycle in refining and petrochemicals, a recovery in telecom net adds, and a rise in gas production will raise investor confidence in RIL's 23 per cent earnings CAGR for F20-23. Asset monetisation and e-commerce ramp-up should also drive outperformance,” it said.