Reliance Petroleum's Triple Option Convertible Debentures (A)

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Case Details:

Case Code : FINC016
Case Length : 7 Pages
Period : 1993-2002
Pub. Date : 2002
Teaching Note : Available
Organization : Reliance Petroleum Limited
Industry : Petroleum and Petrochemicals
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"Till the advent of a big-ticket mop-up of investor funds by Reliance, the stock market was confined to brokers, a few high net worth individuals, the UTI and a small set of investors who profited from investing in MNCs when the companies were forced to dilute their stakes in the mid-70s by the Government. Dhirubhai Ambani made investing in the equity markets an acceptable practice in what was essentially a market with a narrow investor base in the 70s and part of the 80s."

- Business Line, July 2002.

An Innovative Financial Instrument

In September 1993, Reliance Petroleum Ltd. (RPL), a part of the Reliance Group made an initial public offering (IPO) to partly finance its Rs 51.42 billion refinery project. RPL planned to establish a 9-million-tonne refinery at Jamnagar, Gujarat. This was the first private sector refinery to be set up in India, pursuant to the oil sector reforms.¹

The total public issue was of Rs. 21.72 billion while the net offer to the Indian public amounted to Rs 8.62 billion. This was the largest issue in India at that time and was made through an innovative financial instrument in the form of Triple Option Convertible Debentures (TOCDs). The RPL TOCDs were rated BBB+ ('triple B plus') by Crisil² and Fitch.³ Capital market analysts appreciated RPL's move to issue TOCDs to raise capital from the public since they felt that these financial instruments would benefit the company as well as the investors. The TOCDs were not structured as a conventional debt since they did not have to bear the burden of interest costs for the company.

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Moreover, they also provided with an option to investors to opt for equity shares at the time of TOCD conversion in September 1997 in case the listed price of RPL stocks was higher. Analysts believed that the TOCDs would also ensure that RPL maintained its debt-equity ratio at 1:1.

However, some market observers expressed doubts whether this mega issue would be fully subscribed given the depressed stock market conditions during that time. Despite these fears, the RPL TOCD issue was successful. The issue created an investor base exceeding two million, the second largest in the Indian corporate sector next only to Reliance Industries Limited (RIL).

Market analysts attributed this success to the investor friendly image of the RIL Group. The use of convertible securities that reduced the investors' risk and provided them with the option of converting debentures into tradable securities also contributed to its success.

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1] The oil sector reforms involved deregulation of the marketing of controlled products namely LPG, gasoline, kerosene and diesel.

2] The rating indicated sufficient safety with regard to timely payment of interest and principal. However, adverse circumstances were more likely to lead to a weakened capacity to repay interest and principal than for debentures in higher rated categories.

3] US based Fitch is a leading global credit rating agency originally known as Duff and Phelps. It rates financial instruments on the basis of their repayment ability. BBB+ indicates investment grade rating with a low probability of default. However, this rating was later withdrawn in 2001.