“Reliance Industries,” a name that resonates across every corner of India. It stands as a colossal player in the nation’s economic landscape. You can’t deny the company’s influence in almost every sector of India ranging from petrochemicals to telecommunications, retail to energy. But here’s the intriguing question- Why does Reliance need IPO for Reliance Jio?
You know, there’s not just a couple of reasons but a bunch of them.
And guess what, Reliance split off its money arm, like a separate piece, called Reliance Jio Financial Services Limited (JFSL).
So, what’s coming up next? Could it be Reliance Future Retail IPO and Reliance Jio IPO? Jump into the story of this corporate saga. Here, we will uncover the reasons that prompt this titan to invite the public to join their next venture.
(A) Story So Far
The spotlight was on Reliance Industries as it hosted its 46th annual general meeting (AGM) on August 28, led by Mukesh Ambani. With Jio Financial Services (JFS), the spun-off financial arm, making its stock market debut, shareholders were eager to catch Ambani’s announcements.
Notably, Jio unveiled a series of new devices, raising curiosity about what lies ahead. Amidst the excitement, eyes turned towards the potential initial public offerings (IPOs). Whose IPOs? You may ask. The IPO of Reliance Retail and Reliance Jio, as Ambani was expected to provide insights into the timing.
(A.1) Promises made by Reliance Industry Limited
Reflecting on his previous year’s AGM speech, Mukesh Ambani had promised to share updates on the IPOs. Mainly of Reliance Retail and Reliance Jio this year. “I’ll discuss your suggestions with our board of directors regarding Jio and Retail’s IPOs. The rules for timing and valuation of IPOs remain constant. I’ve outlined the strategies for both segments. Jio is all set for an aggressive 5G launch, while retail is experiencing exponential growth. Stay tuned for IPO updates in my speech next year,” he affirmed.
(A.2) What is an IPO?
For the uninitiated, let me explain the acronym “IPO” in simple terms. An Initial Public Offering (IPO) is when a company decides to sell its shares to the public for the first time. This allows individuals and investors to buy a part of the company and become shareholders.
All these stuff boil down to one question- “Why does Reliance, a conglomerate of immense stature, feel the need for an IPO for Reliance Jio?”
Go through the next sections, and you will find out the answer soon!
(B) Why does Reliance need an IPO for Reliance Jio?
Reliance Industries Limited (RIL) has planned to IPO its subsidiary, Reliance Jio, for strategic reasons. The IPO will allow RIL to unlock the value of its investment in Jio and provide an opportunity for shareholders to participate in the growth potential of the company.
By going public, Reliance Jio can raise funds from the market, which can be used for future expansion and investment in new ventures. Additionally, the IPO can help in reducing debt and strengthening the balance sheet of RIL.
Moreover, listing Reliance Jio can enhance transparency, as public companies are required to disclose financial information and adhere to regulatory standards. This can increase investor confidence and attract more institutional and retail investors.
Let’s delve into the details one by one-
(B.1) Capital Infusion and Expansion
Reliance Jio has been a disruptive force in India’s telecommunications industry. We all have witnessed it. Right? Recall the days in the year 2016 when Reliance was distributing Jio sim cards with internet data and voice calls free of cost. That was the revolutionary entry of 4G services in Indian smartphones.
Jio was successful in amassing a large subscriber base and transforming the digital landscape. However, further expansion and innovation require substantial capital. An IPO can inject a significant influx of funds into Reliance Jio, enabling it to invest in the rollout of advanced technologies. Such as 5G, expand its network infrastructure and develop new digital services.
(B.2) Unlocking Value
Reliance Jio’s success has increased its valuation over time. In the AGM 2023, Mukesh Ambani welcomed the Qatar Investment Authority. The latter grabbed a 1% equity stake in Reliance Retail with an investment of $1 billion. The valuation of Reliance Retail increased from Rs.4,28,000 crore in 2020 to Rs.8,28,000 crore in 2023. Similar is the case with Reliance Jio telecom services.
Reliance Jio’s success has increased its valuation over time. By going public, Reliance Industries can unlock the hidden value within Reliance. Eventually, it will provide investors an opportunity to realize the value of their investments. This can potentially boost the overall valuation of the conglomerate. Also, it will attract new investors who believe in Reliance Jio’s growth potential.
(B.3) Financial Flexibility
The gross debt of Reliance Industries stood at Rs.3,14,708 crore as of March 2023. This is a threefold rise in the Net Debt of the conglomerate. Out of it, Reliance Jio carried a debt of Rs.42,486 crore. So, the proceeds from the IPO can be used to pay down that debt.
The IPO will not only improve the company’s financial health but also enhance its creditworthiness. Financial flexibility gained through the IPO is crucial for aggressive expansion plans without straining the balance sheet.
(B.4) Fuelling R&D
Do you know what is the mantra of staying ahead in the competitive tech world? You need to stay ahead in research and development consistently.
IPO funds can empower Reliance Jio to invest immensely in R&D to fuel innovation. This will allow it to remain at the forefront in the creation of advanced technology.
The R&D is highly crucial in the telecommunications industry, where advancements drive customer experiences and market share.
(B.5) Competitive Edge and Market Positioning
The capital infusion from an IPO can strengthen Reliance Jio’s competitive position against rivals in the industry. It will enable the company to seize market opportunities swiftly, acquire strategic assets, and offer improved services. All these features will attract and retain customers.
(B.6) Employee Incentives and Retention
An IPO can pave the way for offering stock options or equity incentives to employees. It will align their interests with the company’s success. This will not only help in retaining the talent. But will also motivate the employees to contribute to Reliance Jio’s growth and performance.
(B.7) Enhanced Governance and Transparency
As a publicly traded entity, Reliance Jio will be subjected to regulatory and reporting requirements. This will enhance the governance standards and transparency in operations. Thus, it can attract investors who value well-managed companies.
(B.8) Diversification of Portfolio
Reliance Industries has diverse business interests. An IPO for Reliance Jio will diversify its portfolio further. This can help mitigate risks associated with specific industries and economic cycles. Thus, Reliance Jio IPO will help in making the overall conglomerate more resilient.
In essence, an IPO for Reliance Jio holds the potential to fuel its growth, support innovation, strengthen financials, and establish a transparent and accountable structure. It’s a strategic move that will align with Reliance Industries’ overarching goals and objectives. Thus, it will aid in positioning both entities for sustained success in a dynamic market.
(C) What are the reasons behind Reliance demerger?
With the demerging of Reliance Financial Services Limited, folks are looking for the demerging of Reliance Jio and Reliance Retail Services. So, what are the reasons being Reliance demerger? The potential reasons are described below-
(C.1) Focus and Specialization
Jio promised broadband connectivity to everyone, everywhere and it successfully delivered it. Now, Reliance is looking to demerge its Jio telecom and retail services. The prime reason is to create separate entities that can focus on specific business segments or industries. The demerger allows each entity to specialize in its respective area. For instance, Jio promised AI to everyone in its latest AGM. But that’s not an easy task. Therefore, the demerger will potentially lead to better operational efficiency and more targeted strategies.
Some of the new objectives of Reliance Jio announced in AGM 2023 are-
- Boost in Artificial Intelligence
- Jio Air Fiber: Fixed-wireless broadband offering
- Launch of Jio Smart Home Services
- Jio Bharat 4G phones (We have already covered it in detail. Check out the article for more info)
- Launch of Jio True developer platform
(C.2) Positive Growth Prospects
Demergers can potentially unlock hidden value within a conglomerate. Separate businesses might have different valuations and growth prospects compared to the combined entity, which could result in a higher overall value for shareholders.
We have witnessed the success of Jio Financial Services in its post-demerger era. Mukesh Ambani, the chairman of Reliance Industries presented the future outlook of Jio Financial Services Limited. They will offer easy, yet smart products (insurance solutions) through a seamless digital interface.
(C.3) Investor Preferences
Reliance is one of the largest conglomerates in India. Its diverse business activities give rise to a kind of conflicting scenario for investors. How’s that possible? You may ask. See, conglomerates are required to demerge their arms if their diverse business activities don’t align with the preferences of certain investors.
Some investors might be interested in the Jio telecom segment of Reliance but not in the retail segment. Thus, by demerging, Reliance can attract new potent investors who are specifically interested in each segment.
(C.4) To Simplify the Management
Well, this is one of the prime objectives of demergers. The conglomerate giants like Reliance face numerous difficulties in managing various complex business units. Demergers simplify the corporate structure, making it easier to manage operations and allocate resources efficiently. Reliance has proved this by showcasing the success of Jio Financial Services Limited (JFSL) after making it public.
(C.5) Risk Management
If one business unit carries significant risks, then it can affect the entire conglomerate. Thus, demerging can isolate those risks and protect other businesses from negative impacts.
(D) Will Reliance Shareholders get Jio Shares?
If you are already a shareholder of Reliance, then will you get the shares of Reliance Jio too? This is the most anticipated query of the folks. Well, it depends upon the company whether you will get the shares or not.
In the world of business chess, when a company decides to split its pieces and go separate ways. It often throws a share party for its existing backers. It means that it announces the “distribution of shares” from the new company to its existing shareholders. But here’s the twist. This shindig usually comes with a side effect, as the value of the company’s own stock takes a bit of a rollercoaster ride downward.
In the case of the demerging of Reliance Jio Financial Services, the existing shareholders of Reliance received the shares of JFSL too.
Each Reliance Industries shareholder had been assured shares of Jio Financial Services in a 1:1 ratio. This entailed receiving one financial arm share for each held in the parent company.
So, the answer to your question is- Yes, the Reliance Shareholders will get Jio Shares after demerger. However, the ratio of shares is yet to be announced by the company.
By now, you must have realized why Reliance needs an IPO for Reliance Jio. In conclusion, the decision of Reliance to consider an IPO for Reliance Jio emerges as a strategic move with multifaceted benefits. By tapping into the public market, Reliance Jio can secure the substantial capital needed for expansion, innovation, and debt management.
Note: It is important to note that Reliance Jio has not undergone an IPO as of September 2023. Reliance Industry Ltd. mentioned during its Annual General Meeting in 2019 that Reliance Jio might be listed within five years or by 2024.
The IPO will not only unlock hidden value within the Reliance Jio. But will also provide investors with a chance to be part of its growth story. This move will position Reliance Jio to compete fiercely in the ever-evolving telecommunications landscape.
Thus, Reliance Jio IPO will signal a commitment to transparency, governance, and long-term success!