RIL partly paid premium shrinks ahead of first call payment

Analysts advise investors to make switch to fully paid shares

The prices of Reliance Industries’ (RIL’S) partly paid (PP) and fully paid (FP) shares have started to converge ahead of the first call payment later this month.

On Tuesday, partly paid shares -- issued last year during its ~53,124-crore rights issue — traded at a premium of just ~16.3. In November 2020, the premium was as much as ~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 instalment of ~314.25 per share to the company by May 31.

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

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

“We recommend long-term 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 ~16 and by October the premium will vanish to par or even move to a slight discount.”

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

“When the 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 ~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 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’S 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 ~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 FY20-23. Asset monetisation and e-commerce ramp-up should also drive outperformance,” it said.