The Story
A corporation may occasionally issue its staff shares as a form of reward. It aims to give customers the impression that they are also co-owners of the business. If the business is publicly traded, the employees can readily sell their shares and profit. But if it’s a private corporation, things can get a little bit trickier. It’s mostly just paper wealth, after all. And for employees to actually profit from it, one of three things must occur.
- The business must exercise generosity and pay more to repurchase the shares.
- Employees are able to sell their shares on the open market when the company does an IPO.
- The employees send out feelers in the underground market to try and find buyers who’ll take the shares off of their hands at a hefty premium.
And it’s this third bit that employees at Reliance Retail Ltd resorted to. Over the years, some employees got their hands on the company’s shares and offloaded them in unofficial markets exchanging them for cash.
This meant that some fortunate (or unhappy, but we’ll get to that) people who weren’t employees managed to obtain these highly sought-after shares. And the reason we say desired is straightforward. In the 2019 black market, buyers were prepared to pay 500 per share for the shares. at a staggering 200 P/E multiple. Essentially, investors were willing to pay 200 to acquire each rupee of profit that the company produced per share. For comparison, D-Mart, one of Reliance Retail’s more well-known competitors, was trading at a P/E of 93 times when it was launched on stock exchanges. The love for Reliance Retail soared even more in the past few years — just last week, investors were willing to shell out ₹3,000 rupees a share.
That’s a whopping 500% return in just 4 years. And the market for Reliance Retail shares was reaching dizzying heights.
Now, all of this was made possible by some rapid growth. Reliance Retail’s revenues have reportedly reached $32 billion, according to a recent Alliance Bernstein study. This is 2.5 times bigger than the combined size of the next 3 retail behemoths. Its market share of the total retail pie, which includes both organised and unorganised retail, increased from 1.2% in FY18 to 3% in FY23. And over the past five years, the firm had stretched its tentacles all over the place. by investing in Dunzo for hyperlocal commerce, purchasing Netmeds in the pharmaceutical sector, acquiring Urban Ladder for furniture, bringing Pret A Manger to India, and investing in Urban Ladder and Clovia for lingerie. And even that is only a small sampler. The list continues.
Oh, and to add fuel to the fire, there were whispers about an impending IPO for Reliance Retail too. Everyone wanted a piece of the stock before it popped during a public listing.
However, these investors experienced the shock of their lives on Friday.
What happened, you ask?
Reliance did indeed make a significant announcement. It stated that it desired to own all of its shares. Retail investors, who hold just 0.09% of the shares, are also wanted out of the picture right away. Reliance will purchase them.
It seems like a good thing, doesn’t it? It’s the first exit option we mentioned at the outset. So, investors ought to have been content.
But consider this. Reliance only wants to spend Rs 1,362 per share!
What? That implies that all of the investors who snatched up shares at 2,000 and 3,000 will suffer significant losses. They feel that they’ve been cheated by the family of the richest Indian. That they should get the share price they deserve.
But consider this. Maybe there isn’t much point to all of this shaming. Perhaps these investors should take the blame. And perhaps they ought to have paid a bit more attention to what was going on rather than running out to buy the “next big thing.”
First of all, if they had read research papers, they would have seen that the majority of brokerages stated something to the effect of “We believe Reliance Retail contributes 30-40% to Reliance Industries’ share value.” They indicated that if shares of Reliance Industries were selling for 2,500, then 750–1000 of that price was attributable to the retail unit’s profitable operations.
Investors operating in the private markets need to have utilised that price as a sort of anchor before making decisions.
Secondly, sure you could argue that there were only a limited number of shares available. There was a scarcity. And that would’ve created a premium. That’s fair. But maybe they should’ve paid a bit more attention to what happened in 2020.
You see, the Reliance expansion drive had barely started at the time. Additionally, it sought to raise a few thousand crores in order to achieve its retail goals. As a result, it attracted investment corporations like General Atlantic, Abu Dhabi Investment Authority, and Silver Lake.
You’d think that investors would have been thrilled. Major figures sat at the table. And everyone would have believed that an IPO was close at hand.
But consider this. Through Reliance Retail, Reliance did not actually raise any money. In fact, it had created a completely new organisation in the middle, called Reliance Retail Ventures Ltd. The holding company for all of Reliance’s retail plans would be this RRVL. Reliance Retail and a few more subsidiary businesses would fall under its umbrella. And in order to raise money, RRVL sold a 10% stake.
The ultimate arrangement was somewhat like this: Reliance Industries owned Reliance Retail Ventures Ltd, which was also controlled by some major investment firms. And this entity in turn owned Reliance Retail.
So with RRVL in the mix, the equation had changed drastically. As the folks at investment firm Capitalmind pointed out quite presciently back then:
“… all value unlocking is happening at the parent level, i.e., in Reliance Retail Ventures. So, it will become much more difficult for these shareholders [Reliance Retail] to find a buyer for these shares. Even in the future if RIL [Reliance Industries Ltd] plans to list its retail unit, it will be Reliance Retail Ventures which will get listed.”
And if you add all of these things up, you’d have to admit that Reliance hasn’t stolen money from its stockholders. On the wall, the message was clear.
Reliance doesn’t seem to be being frugal at all right now, in fact. In order to do a company appraisal, it hired two well-known firms, EY and BDO. Furthermore, these people stated that one Reliance Retail share is worth between 850 and 900 rupees. Because of this, Reliance is prepared to pay a 50% premium to acquire back the shares. It does not seem to be intentionally trying to defraud anyone. As for the out-of-whack prices in the private sector, that is actually not Reliance’s fault.
Investors, though, are irritated. due to the emotions that drive them.
So, the question is — do the investors have any recourse at all?
Well, some folks are pointing to what happened in 2019. Back then Reliance had said that it would do a share swap. Give 1 share of Reliance Industries for every 4 shares of the unlisted Reliance Retail. But investors pushed back. They said that the valuation was too low. And the plan failed because investors pushed back.
So, yes, perhaps a similar incident will occur again.
It’s also possible that Reliance will be asked to review the valuation by the National Company Law Tribunal (NCLT). Perhaps it will help given the loud protests from the minuscule minority of shareholders? We have no idea.
But for the time being, all we can say is that Reliance doesn’t appear to be doing much wrong in terms of how it’s doing this. And perhaps the investors ought to have been a little more watchful? Which do you believe?
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Also Read: Reliance Retail Valuation update