One thing must be made clear about the hype of Reliance being net debt free, it’s not all good for any company like reliance to become debt free and increase the pressure on other financial instruments when they know the consequences. Here we will deliberate upon the real question, Why they went on to become net debt-free even after knowing all this?
How Reliance became net debt-free?
Till March of 2020, Reliance had net debt of 1.61 trillion which currently stands nill as they raised around 1.71 trillion from the market through investments and sales of share to the stakeholder.
Billionaire Mukesh Ambani says Reliance Industries is now net-debt free after raising Rs 1.69 lakh cr
Reliance raised 1.15 trillion through a 24.71% stake sale in digital assets subsidiary Jio Platforms Ltd to around a dozen investors, including Facebook, Silver Lake Partners, Vista Equity Partners, General Atlantic, KKR and Mubadala.
Facebook to invest Rs 43,574 crores in Jio platforms for a 9.99% equity stake: Jio-Reliance Industries Limited statement
Mukesh Ambani quoted “ I have fulfilled my promise to the shareholders by making Reliance net debt-free much before our original schedule of 31st March 2021.”
The company further quoted:
“Jio Platforms has raised Rs 115,693.95 crore from leading global investors including Facebook, Silver Lake, Vista Equity Partners, General Atlantic, KKR, Mubadala, ADIA, TPG, L Catterton and PIF since April 22, 2020,”
This development is hailed across the globe as RIL Rights issue became the largest with the subscription of 1.59 times by any non-financial company in the last ten years.
Since we have thrown a lot of data and financial jargons at you, here are some of the takeaways which will help you understand the situation better.
Why Reliance became debt-free?
It was found that in the last ten years gross debt of Reliance increased by 420%,interest expenses grew by 691 % and the profits rose around 63%. These stats show that most of the income was going in paying the interest of loans (Long term and Short term) which reflected on their balance sheet.
This decision is driven emotionally more than financially. Every company of this size works in huge debt and turns it around every year making profits and paying dividends to the shareholders. The debt keeps on increasing without the profits going down. These numbers are psychologically disturbing to many who don’t really understand the business cycle of big MNCs.
Reliance going debt-free has helped its shareholders trust the company as there is no “debt” as if they were struggling to pay the loans and they would go bankrupt (Totally Fictional). To quantify this statement it should be noted that its shares soared over 8% intra-day after it declared itself net debt-free, nearly nine months ahead of schedule.
If it would be me I would call it an admiration move more than the financial tactic.
What’s so special in Reliance?
You may call Reliance the biggest Conglomerate of India in many aspects and hail the emergence of an Indian Business Tycoon as they have achieved the milestone of attracting huge investments even in the situation when everyone else started cutting costs and productions. They are special but the credit should go to the country they operate in.
There are many investors, but we will stress upon Facebook as they are the biggest and the most popular one.
Getting on the point, you must be happy to know that digital services sector including telecom has grown 352% in the last two years which was the major reason for Facebook becoming a family member of Reliance.
As it is said frequently “data is the new oil” Facebook is trying to grease their machinery with this oil which is present in abundance in India. Jio making the biggest breakthrough in the telecom Industry in past years becomes the obvious choice for anyone like Facebook.
Facebook is also looking to expand its base in India like Walmart, Amazon and Google have already done, they don’t want to miss out on more than 700 million smartphone subscribers of the fifth largest economy of the world.
Some opinions discouraging this decision
Reliance has played psychologically and emotionally which certainly drives the market of the country like India. People invest with emotions more than their understanding of financial ratios or number on the balance sheet. On this front, no one can take back the credit form Reliance after achieving this milestone.
But when we look at the business perspective it is always advised to diversify the portfolio to mitigate the risks of going bankrupt in the future. Reliance has parted ways with one of the most important financial instrument and is relying immensely on equity. Doing this not only increases the risk but also decreases the financial leverage they get from Long Term and Short Term debt.
These are some of the broad benefits of debt financing which can’t be ignored
Debt lets you keep the ownership which is not the case with other financial instruments
Your board members get the maximum voting rights and the control over the decisions
Interest Payments Are Tax-Deductible which puts a positive impact on the balance sheet
You don’t have to share the profits with the lenders
These benefits are enough to make you understand that all is not good in this decision of Reliance going net Debt-free.
This was all you need to know about reliance being debt-free. It must be noted that this decision is highly appreciated by most of the people and Reliance only did what they promised a while back. Our task is to make you understand the white, the grey and the black of every scenario, rest depends on your insights and the comprehension of the subject matter.
It would have been better if they lowered the debt and maintained the combination of diverse financial instruments including debt. A lot has been said and done but the real boss is Reliance as they are capable of disrupting any market and coming out as a winner within no time.