[By Raghav Sengupta]
The author is a student at Jindal Global Law School.
Introduction
In June 2020, an unprecedented series of events was triggered by Reliance Industries Ltd (hereinafter “RIL”) that conducted India’s largest ever rights issue for the subscription of shareholders.[i] The industry giant finalised a Rs. 53,124 crore ($ 7 billion) rights issue that was condensed into 3-stage deferred payment offer. This rights issue was in furtherance of RIL’s objective of raising public funds to eliminate any pending debts and create a zero net debt for the current fiscal year.[ii] RIL rolled out this unprecedented rights issue offering one share for every fifteen shares held, to existing shareholders, at a cost of Rs. 1,257 per share (1:15 rights issue).[iii]
By way of such rights issue, RIL and similar companies created a right in favour of their existing shareholders to purchase new shares at a cost that is significantly lower than the present market trading price.[iv] In the current scenario, it can reasonably be inferred that RIL conducted this process with the prerogative of reducing overall debt, in addition to remunerating pre-existing shareholders for their investments, while significantly bolstering the belief of their promoters. However, being the largest ever rights issue and the first of its kind, RIL’s initiative raises a few queries regarding the manner in which the Company raised funds.
Public offerings are traditionally pursued by companies in order to raise capital, for their various transactions, by offering a stake (share) in their company in return for a pre-determined price. These public issues are enumerated in Section 23 of the Companies Act 2013 (hereinafter “The Act”) which prescribes the various procedures that a company has to undertake in order to issue securities to the general public.[v] To provide context for the proposed discussion, it is pertinent to understand that Section 23(a) of the Act[vi] deals with public offers through a prospectus, whereas Section 23(c)[vii] is based on the issuance of securities by way of a rights issue for listed companies.
A company usually makes public offerings by way of (1) initial public offerings or (2) further public offerings.[viii] RIL had previously made a public offering and established a strong financial foothold in the economy.[ix] Considering the large number of shareholders that this rights issue brought into the loop, it would not be irrational for some to contend that this mechanism could come under the purview of a public offer. Through this piece, the author shall assess whether RIL’ largest ever rights issue, owing to its sheer magnitude, could be categorically placed within the ambit of a public offer.
Analysing RIL’s legal conundrum
As per Section 62(1) of the Act, rights issues are synonymously prescribed in numerous sections with no clear-cut definition explaining its meaning. As per the SEBI Regulations 2009[x], the term ‘rights issue’ is usually used to denote transactions pertaining to listed companies. Regulation 2(1)(zg) specifically describes a ‘rights issue’ as an ‘offer of certain securities’ by a company that has been listed by the stock market.[xi] These shares (securities) are then offered to pre-existing shareholders, at a discounted rate, for various purposes which can revolve around raising capital for the issuing company. In the case of RIL, the Company carried out the largest ever rights issue offered only to their existing shareholders, thereby vesting them with the ‘pre-emptive’ right to play a vital role in the issue.
RIL’s existing shareholders were vested with the authority to subscribe to the proposal in whole or even partially. Further, they were permitted to rescind the shareholdings that had been offered to anyone who was not a pre-existing investor and had previously taken part in RIL’s public offering processes.[xii] Rights issues are often conducted by organizations to exercisetheir legal powers or simply comply with statutory requirements by determining the appropriate number of investors.[xiii] Whereas, public offerings are initiated to acquire capital for a variety of goals including as diversification, funding working capital requirements, investing in commodities, and debt restructuring.[xiv] The means of raising the requisite capital, via the rights issue, enables the company to secure funding. While in the case of a public offer, a company like RIL would have had to bring in several functionaries such as intermediaries and their respective costs into the fray. Therefore, RIL’s method of raising funds, by way of rights issue, was an efficient and cost-effective mechanism.
RIL’s rights issue also carried the ‘right to renunciation in favour of third parties’ which is stipulated in Section 26(2) (a)of the Act.[xv] It is undisputed that an offer notification shall also comprise of a right to renounce one’s shares. This essentially means that RIL’s right to subscribe to shares could be allocated to a third party, who need not have a previous investment in the Company. So far, it is clear that rights issues are usually given to existing shareholders of a certain organization, by selling them these shares at a cost which is lower than that of the market price.[xvi] . There is a strong possibility that such a shareholder exists who might not wish to accept the rights issue being offered by RIL. In order to curtail the possibility of facing such issues while raising capital, companies like RIL offer their shareholders the ‘right to renunciate’ shares.
A rights issue or a public offer: What is an ‘offer to the public’?
Another point of differentiation in determining whether what RIL actually implemented was a rights issue or a public offer can be ascertained from the intention of the Company’s directors at the time of issuing an offer/prospectus/notification depending on the circumstance. The key component to understand here is that the Company had carried out this project by satisfactorily identifying the target persons concerned with raising capital. Here, they clearly identified the investors by stating that the issue would be open exclusively to pre-existing shareholders and would not be open to new prospective stakeholders. In addition to this, they had granted the ‘right to renunciation’ to prevent the participation of completely new investors for the company, and raise capital by allowing these pre-existing shareholders to transfer their rights.[xvii]
As per Section 42(3)[xviii] of the Act, if a corporation, listed or unlisted, agrees to distribute shares to greater than two hundred individuals in a fiscal cycle, or accept subscriptions, or tries to enter itself into an allotting arrangement, it is known as a public offer.[xix] If a corporation in a fiscal term offers subscriptions or offers shares to either two hundred or more individuals, we could assume that such an offer is considered to be a public offer.[xx] This is consistent with the decision of Sahara India Real Estate Corp. Ltd. v. SEBI,[xxi] where the Supreme Court held that the term ‘share and debenture issue’ could be interpreted to mean that offers made to fifty or more individuals (later amended to two hundred individuals) could be considered a public issue. If there is an issuance of such shares to more than two hundred such individuals, the offer, by virtue of falling into the public issue category, would result in a violation of the laws.[xxii]
In order to conduct a public offering, a corporation must submit a requisite application to one or more recognized stock exchanges.[xxiii] In addition to these steps, a prospectus also has to be issued to the public at large inviting them to make investments under Section 26 of the Act.[xxiv] However, there are certain restrictions to the issuance of prospectuses which chiefly extended to shares/debentures and ‘rights issue’. Section 26 and its provisions “do not apply to existing members or debenture-holders who have an existing stake in a particular company”,[xxv] regardless of whether such stakeholders have been offered the ‘right to renunciation’. Hence, the guidelines that have been discussed so far will not apply to RIL’s rights issue taking into considering all the above factors. These clearly elucidate that the motive and conduct of the RIL was crystal clear and they had adhered to all the requisite procedures required for implementing this exercise.
Conclusion
Under the terms of the 2009 SEBI (ICDR) Regulations in as well as Section 62 of the Act, it has been established that a company must clearly identify the target group of individuals to which it wishes to make an offer. Here, RIL’s intention is restricted to its pre-existing shareholders. Corporations prefer to use the rights issue approach to generate capital quicker and more efficiently faster, thereby guaranteeing that stakeholders and promoters are driven by lowering their ‘debt-to-equity’ level. Certain corporations choose to pursue the mechanism of public offers to maintain privacy and transparency of the activities of the company, which could potentially dampen investor leverage.
Public offers could even become a more reasonable alternative with suitable changes in market conditions. For a conglomerate like Reliance, the advantages of generating vast sums of requisite assets by the way of rights issues has its own set of advantages in terms of efficiency and performance. It is undoubtedly the most accelerated way to increase capital and also generate a greater degree of faith amongst pre-existing shareholders by rewarding them for their investments.
[i] “Reliance Industries announces successful closure of rights issue of Rs 53,124.20 cr” (Business Standard: June 4, 2020) available athttps://www.business-standard.com/article/news-cm/reliance-industries-announces-successful-closure-of-rights-issue-of-rs-53-124-20-cr-120060400335_1.html; accessed November 10, 2021
[ii] Sanjay, P.R., “Reliance Industries plans its first rights issue in 30 years, aim to become net debt-free” (The Print: April 28, 2020) available at https://theprint.in/economy/reliance-industries-plans-its-first-rights-issue-in-30-years-aim-to-become-net-debt-free/410388/; accessed November 10, 2021
[iii] “RIL brings back chatbot to assist investors on rights issue” (The Economic Times: May 15, 2021) available at https://economictimes.indiatimes.com/markets/stocks/news/ril-brings-back-chatbot-to-assist-investors-on-rights-issue/articleshow/82659827.cms; accessed November 10, 2021
[iv] Staff, Reuters. 2020. “Reliance Industries Closes $7 Bln Rights Issue, India’s Largest Ever”. [online] U.S. Available at: https://www.reuters.com/article/india-reliance-rightsissue-idUSL4N2DH17G [Accessed 14 December 2020].
[v] § 23, The Companies Act 2013
[vi] §23 (a), The Companies Act 2013
[vii] §23 (c), The Companies Act 2013
[viii] Kapoor, G.K., 2020. A Comprehensive Textbook on Companies Act 2013 (University Edition). 22nd ed. Delhi: Taxmann, p. 137
[ix] Reuters, supra note 4
[x] Regulation 2(1) (zg), SEBI (Issue of Capital and Disclosure requirements) Regulations, 2009 (ICDR Regulations)
[xi] Ibid.
[xii] Saravanan, P., “RIL rights issue: What’s in it for you” (Financial Express: May 6, 2020) available at https://www.financialexpress.com/industry/reliance-rights-issue-whats-in-it-for-you/1949127/
[xiii] Agarwal, D.K., “What’s in it for shareholders in a rights issue” (The Economic Times: September 11, 2021) available at https://economictimes.indiatimes.com/markets/stocks/news/whats-in-it-for-shareholders-in-a-rights-issue/articleshow/86112754.cms
[xiv] Manu, K. S., and Chhavi Saini. “Valuation Analysis of Initial Public Offer (IPO): The Case of India.” Paradigm 24, no. 1 (June 2020): 7–21.; available at https://doi.org/10.1177/0971890720914100.
[xv] § 26 (2) (a), The Companies Act 2013
[xvi] Saravanan, P., supra note 12
[xvii] Kapoor, supra note 8, pp. 221, 229
[xviii] §42(3), The Companies Act 2013
[xix] Kapoor, supra note 8, pp. 214-216
[xx] Ibid.
[xxi] Sahara India Real Estate Corp. Ltd. v. SEBI, (2013) 1 SCC 1
[xxii] Ibid.
[xxiii] Securities & Exchange Board of India (SEBI). “Issues by Indian Companies in India .” Government of India, February 12, 2016; available at http://www.sebi.gov.in/.
[xxiv] §26, The Companies Act 2013
[xxv] Kapoor, supra note 8, p. 217