Why RIL wants to merge RPL with itself

28 Feb 2009, 1023 hrs IST
Why the merger?

RIL has traditionally set up large capital-intensive projects under new companies to ring-fence itself from project risk. This happened with the first Jamnagar refinery, also called Reliance Petroleum. Now that RPL is up and running, it doesn’t make sense to keep it separate.
Why now?
RIL has not issued any statement. There is speculation that RPL is sitting on inventory losses and may need balance sheet support from RIL. RPL enjoys a 7-year tax break while the export-oriented status of the first unit of the Jamnagar refinery, which is part of RIL, will expire soon.
Chevron link
Chevron bought a 5% stake in RPL in 2006. It had the option to increase it to 29% before July 2009, and the speculation was that the merger would follow. The non-exercise of this option hastened RIL’s decision to fold its 70% subsidiary into itself.
Treasury stock
It could be cancelled to prevent equity dilution. RIL may also create an SPV to park the treasury shares and sell them or borrow against the stock later.
SEZ & EOU status
RPL and RIL will not lose SEZ and EOU status. They will remain as they are.
What are bankers saying
Banks say their single-borrower limit may be breached following the merger. Bank officials say they may have to ask RBI for a special dispensation.
What's in for investors
The market feels RPL shareholders will lose out. But the final position will depend on the swap ratio. The ratio could be between 17:1 (17 RPL shares for one RIL share) based on Friday’s closing prices and 24:1 derived from the book value. Analysts say it could be around 20:1. It also depends on whether the treasury stock is cancelled.