Without paying any tax RIL and Jio gained billions

Reliance Industries Ltd (RIL) has announced the largest, fastest fund-raise so far in India Inc - more Rs/- 1.5-lakh crore through a stake sale of about 33 per cent in its subsidiary Jio Platforms to 13 marquee foreign investors. But, neither RIL nor Jio Platforms may be paying any tax on the stake sales, thanks to some smart deal structuring, show documents filed by Jio Platforms on the Ministry of Company Affairs (MCA) portal.

Jio Platform’s total equity as of March 2020 comprised equity share capital (₹4,961 crore) plus other equity (₹1,77,064 crore). This ‘other equity’ was optionally convertible preference shares (OCPS) issued to RIL. It was earlier believed that when investors bought stake in Jio Platforms, they were given equity shares by converting the OCPS held by RIL. So, the amount of OCPS would have reduced while the share capital increased, keeping the total equity the same. Thus, dilution of earlier shareholders (except RIL) did not happen when shares were issued to new investors. Ergo, the stake sales seemed to have been structured as a transfer of shares from RIL.

By this arrangement RIL is left liable to pay capital gains tax as it would have sold equity shares converted from the OCPS that it held in Jio Platforms to the investors at a premium. The gains on such transfer of securities would have been categorised as short-term (taxed at the highest applicable rate, in excess of 30 per cent), given that Jio Platforms was incorporated only late last year.

The potential tax pain seems to have been side-stepped by a simple method - fresh issue of shares by Jio Platforms to the various investors. To Facebook, the first investor, and also a strategic one, Jio Platforms issued both equity shares and 0.01 per cent CCPS (compulsorily convertible preference shares) at ₹488.34 per share. Google, the latest investor and also a strategic one, was issued equity shares at the same price - ₹488.34 apiece. All the other investors were issued equity shares at a higher price - ₹549.31 a share. With these total share proceeds of ₹1,52,318 crore, Jio Platforms redeemed OCPS worth ₹1,29,046 crore held by RIL and retained ₹23,272 crore with itself.

Through these shares by Jio Platforms, RIL got repaid a chunk of its OCPS, thus reducing its own net-debt position significantly. The redemption of OCPS held by RIL is essentially repayment of funds earlier infused by RIL into Jio Platforms, and will not attract tax.

Jio Platforms could retain a portion of the funds for its own purposes. As it was Jio Platforms that issued the shares, RIL will not have to pay tax on the stake sale.

Jio Platforms, too, would not have to pay tax though it issued shares at a tidy premium - that’s because the pricing of the shares took into account their fair value based on the report of an independent valuer. Also, Jio Platforms seems to have opted for a fund-raising model adopted by many start-ups that raise capital from a series of investors within a time window.