Ever since Jio Financial Services Ltd (JFSL) was listed in July 2023, investors have been awaiting news on the potential listing of another subsidiary of Reliance Industries Ltd (RIL) – its telecom arm Jio Platforms Ltd.
While it’s likely to be listed in the near future, the key question is whether this will be done through a vertical split or a public issue. A vertical split is a mirror image of RIL’s shareholding pattern. Simply put, it means if a shareholder has 100 shares of RIL, they will get 100 shares of Jio Platforms upon listing. RIL’s promoters have a 50% stake in the company and RIL has a 66% stake in Jio Platforms. Thus, with a vertical split, RIL’s promoters would have about 33% direct ownership in Jio Platforms.
The company chose a vertical split when listing JFSL. After the split, RIL’s promoters gained direct ownership of JFSL, with a 46% stake that they have since raised to 47%. The market cheered the listing as it avoided a holding-company discount, and Jefferies India’s analysts expect RIL to go with a vertical split for Jio Platforms, too. However, the answer may not be that straightforward in this case.
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While JFSL’s split led to 46% promoter shareholding, close to a simple majority of 51%, the same exercise may give RIL’s promoters a mere 33% stake in Jio Platforms. Jefferies offers them a solution — raise their stake in Jio after the listing to bring it closer to 51%, as they did with JFSL.
A pricey proposition
But there’s a problem. Increasing their stake in Jio Platforms to 51% would require far more resources than doing so in JFSL. Based on its current market price, the cost of increasing their stake in JFSL to 51% would be about ₹10,000 crore. This is a tiny sum for the promoters, considering their net worth is ₹10 trillion. However, increasing their stake in Jio Platforms to 51% would actually make a dent. The company’s market capitalisation is likely to be around ₹10 trillion, so buying an 18% stake later could cost ₹1.8 trillion, or about 18% of the promoters’ net worth.
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The other option is to go for a public issue. In that case, RIL would maintain its shareholding at 66% and give the promoters more control over the company. Sure, it might attract a holding-company discount, which could be about 20% in the base case, according to analysts at Jefferies. This would value RIL around 5% less than Jefferies’ sum-of-the-parts valuation from a vertical split. In other words, RIL’s market capitalisation and the promoters’ stake would be worth 5% less – hardly a big price to pay to retain a controlling stake.
The Jefferies report, dated 10 July, highlighted that it could be difficult to fill the retail investors’ quota in a public issue as the offering would be huge. Then again, the IPO size of Life Insurance Corporation of India Ltd (LIC) was ₹21,000 crore and the retail portion was 35% of this, or ₹7,000 crore. This quota was oversubscribed by two times, indicating a potential retail appetite of ₹14,000 crore. This amounts to about 5% of the potential market cap of Jio Platforms, assuming a retail quota of 35%. Considering RIL’s penchant for setting records, it may be able to manage the issue. It could also consider innovative options such as offering partly paid shares or a discount for existing RIL shareholders.
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This may all be conjecture for now, but it wouldn’t be wise to rule out any option. While investors may prefer a vertical split, going by the success of the JFSL listing, it’s just as likely that RIL’s promoters will choose the IPO route to retain a controlling stake in Jio Platforms.
