Reliance Petroleum s

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RELIANCE PETROLEUM·SRELIANCE PETROLEUM·STriple Option ConvertibleTriple Option Convertible

DebenturesDebentures



ISSUEISSUE

y To discuss the effect of investing in

coverable securities.



ContentsContents

y Introduction

y Important Terms

y The Options

y Calculation of Rate of Return

y Analysis

y Conclusion



INTRODUCTIONINTRODUCTION

IPO made by Reliance Group, to partly finance itsRefinery Project.

Total public issue was of Rs. 21.72 billion.

Offer to the public amounted to Rs. 8.62 Billion. India·s largest IPO at that time.

Made through TOCDs



Important TermsImportant Terms IPO- An initial public offering (IPO) is the first sale of

a corporation's common shares to public investors.The main purpose of an IPO is to raise capital for thecorporation.

Equity-

It refers to the raising of funds from thepub

lic by issuing shares from the equity share capitalof the company at face value or at premium.

Bonds- A bond is a certificate of intention to pay theholder a specified sum, within a specified date.

Debentures-

Debentures are fixed interest debtinstruments with varying periods of maturity. Theycan be listed on the stock exchanges provided theyhave been rated by a credit rating agency.



Contd.Contd.

Warranties- A warrant entitles the holder to buy a givennumber of shares at a stipulated price.

Convertible/ Detachable Warrant- A detachablewarrant is one that can be sold separately from the originalinstrument it was issued with.

Present Time Value- It is the value of a future stream of

payments or receipts discounted at a given rate to thepresent time.

Rate of Return- Is a comparison of the money earned (orlost) on an investment to the amount of money invested.



"Finance will never be a constraint in executing projects

because Indian investors will provide me with the necessary resources."

- Dhirubhai Ambani, Former Chairman, RIL Group



TOCDs: A closer look TOCDs: A closer look

Beneficial to the company as well as the investors.

They attributed its success to investor friendly image of thecompany.

It would help Reliance maintain Debt- Equity ratio at 1:1.

TOCD was issued at a face value of Rs 60 with attractivepayment schedule.

The holders wont be paid any interest for first five years.They were provided with three options.



TOCD Payment ScheduleTOCD Payment Schedule

Rs. 20* Zero Date- (taken as Opening Date)

1993- Rs. 60- Rs. 10 After 18 Months

Rs. 15 After 30 Months (Issue Price)

Rs. 15 After 36 Months

*It included two equity shares at the face value of Rs 10

each.

It accompanied by two detachable warrants which could beconverted into an equity shares @ Rs 20/share.



Outflow Rs.60 Rs.60 Rs.(60 + 40)

Inflow Rs.(44 + 80 + 10) Rs.(44 + 44) Rs.(80 + 44 +44)

* Warrants can be sold @ Rs. 5 in Sept· 97

Share Price = Rs. 22/

-as on Sept· 97

Bonds Warrants

Option 1

Retain

Sell *

Option 2

Surrender

Surrender

Option 3

Retain

Convert

TOCD OPTIONSTOCD OPTIONS



Calculation of Rate of ReturnCalculation of Rate of Return

Inflow = Outflow ( 1993- Present Value)

Using Present Value & Extrapolation: -

Option 1:

20 + 10/(1+k 1)1.5 + 15/(1+k 1)

2.5 + 15/(1+k 1)3 = 44/(1+k 1)

4 +20/(1+k 1)

6 +30/(1+k 1)7

+ 30/(1+k 1)8

+10/(1+k 1)4

Therefore, k 1= 17.7% (Approx.)



Option 2

20 + 10/(1+k 2)1.5

+ 15/(1+k 2)2.5

+ 15/(1+k 2)3

= 44/(1+k 2)4

+44/(1+k 2)

4

Therefore, k 2

= 16.32% (Approx.)



OPTION 3OPTION 3

20 + 10/(1+k 3)1.5 + 15/(1+k 3)

2.5 + 15/(1+k 3)3

+40/(1+k 3)4 = 20/(1+k 3)

6 +30/(1+k 3)7 +

30/(1+k 3)8 + 44/(1+k 3)

4 + 44/(1+k 3)4



Share Price at which Investors Would BeShare Price at which Investors Would BeIndifferent towards option 1 & 2.Indifferent towards option 1 & 2.

Substituting k in respective equations and

Taking Share Price as Rs.X,

2X/(1+k 1)4 + 20/(1+k 1)6 + 30/(1+k 1)7 + 30/(1+k 1)8 + 10/(1+k 1)4=2X/(1+k 2)

4 +

2X/(1+k 2)4

k 1 = 17.7%, k 2 = 16.32%

Solving for X, we get

X= Rs. 27 (Approx.)



CONCLUSIONCONCLUSION

This case shows that convertiblesecurities limits the risk of investors and

benefits both the issuing company as well

as the investors.

Reliance Petroleum s

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