Reliance gave you the right but...🤷🏽

Not every investor understood what to do with it

This is edition 286 of Beyond The First Order, a premium daily newsletter that demystifies the hidden models, incentives and consequences of the most significant events across India and Southeast Asia

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Good morning,

In 2020, Reliance Industries issued India’s largest-ever rights issue to pare down its debts. But do shareholders really know what they’ve signed up for? 

Although the 10th class Board exam for 2021 was cancelled, the assessment system is still around. And now, individual schools are left to carry the burden. 

India’s state-linked National Investment and Infrastructure Fund (NIIF) is making a grand entrance into tech investments. But is there enough money in its coffers? Let’s dive in. 

It is Reliance’s Right

Last year, oil major Reliance Industries decided that it needs to reduce its debt. And one way to do it was to tap into their existing shareholder base—issue shares at a discount and raise money. The discount was to entice people to participate. And shareholders who held 15 shares of Reliance could subscribe to one share in the rights issue. The Rs 53,000 crore (US$7.2 billion) rights issue was the largest ever in India. 

What Reliance issued, though, were partly paid shares. So it said here’s a share worth Rs 1,257 (US$17.22). And I’m giving it to you at a discount to the current price. You give me Rs 314 (US$4.30) now and I’ll call the rest of what you owe me in instalments over a period of time. 

Anyway, Reliance made the first call for payment of another Rs 314 (US$4.30) on 17 May. And now shareholders have time to pay up till 31 May. 

Why did it issue partly paid shares? Well, it didn’t really need all that money all at once. It was being wooed by foreign investors anyway. And when you give the option to subscribe to the shares in instalments, it drives demand as well. Because shareholders only have to pay a smaller amount upfront. 

Reliance also made history in another way. It was the first time that Rights Entitlement—a type of share given to existing shareholders to participate in the rights issue—was made tradable using one’s broking account.

These REs come with an expiration date. And you can use the RE to subscribe to the share at a discount. If you don’t want to participate in the rights issue, you can just sell the RE to someone else. And because REs are now listed on the stock exchanges, it is easily tradable unlike cumbersome physical applications as was the norm earlier. 

Some investors (even those who weren’t shareholders of Reliance) paid money and bought RE shares when they saw it trading on the stock exchanges. But not everyone understood that these REs just gave the right to buy the share at a discount. It didn’t automatically credit any shares to the broking account and they would still have to subscribe to the shares under the rights issue programme. 

In March, India’s largest broker Zerodha had had enough of people not really understanding REs and losing money. So, they decided to create a behavioural intervention to warn users about how REs work. A nudge. 

By Zerodha’s estimates, their clients had lost Rs 10 crore (US$1.3 million) by buying REs and then not applying for the shares during the period of the rights issue. 

But there’s another way in which investors could lose money too. Because even these partly paid shares are traded on the stock exchanges. 

“Since the upfront payment is less for partly paid shares, many investors prefer to buy PP vs the Fully Paid one, with the objective of creating alpha on their investment,” Hemang Jani – Head Equity Strategy, Motilal Oswal told Financial Express Online.

So instead of buying the regular shares of Reliance, many investors jumped in to buy the partly paid shares. Because it was ‘cheaper’.

But unlike the regular shares, holding on to the ‘cheaper’ partly paid shares means that the shareholders are now also liable to pay the instalment of Rs 314 (US$4.30) that Reliance has called for in order to get the shares. If not, Reliance could cancel their shares and even charge interest. 

The stock was ‘cheap’ for a reason. So if the shareholders of these partly paid shares are not aware of how these shares work, they may not realise they have to cough up the additional money to Reliance. But late realisations are better than no realisation, I guess.

Such things have happened before. Here’s an example from Australia, as reported by Reuters in 2009:

BrisConnections, an infrastructure company, issued partly paid shares. Investors paid A$1 initially with an additional A$2 owed in instalments in April and January 2010. Then, the stock price crashed to A$0.001. Retail investors picked up the shares. But they didn’t know they would further have to shell out A$2 as instalments. 

You got to love how uncomplicated the stock markets are. 

PS: Numbers have been rounded off for simplicity

A bad year for learning. A terrible year for assessments

The decision to hold the 12th standard Board exams in India still hangs in the balance. A meeting between the education minister and the heads of various boards remained inconclusive on the matter. 

Credit (lol) where it’s due, the Central Board of Secondary Education (CBSE), along with a bunch of other state boards, did cancel the 10th class Board exam for 2021. The Board exam is a national, standardised test—it’s the universal gateway to choosing a subject (math, science, commerce, arts) in grade 11 and the arbiter for the kind of college one can get into.

Problem solved?

Far from it.

Turns out, while CBSE has cancelled the centralised exam, it’s not really cancelled the assessment. It has merely transferred the responsibility to individual schools. A classic case of decentralised policy-making, in tandem with other essential processes like vaccine delivery.

The National Independent Schools Alliance (NISA), with over 65,000 affiliated schools, have fought back against CBSE’s decision. NISA’s president Khulbhushan Sharma told The Ken that CBSE’s decision will likely influence many state boards too.

Now, in theory, decentralising a large, clunky operation like the Board could be a good precedent. But, as Sharma claims, CBSE hasn’t really left it up to individual schools how they want to evaluate their students. There’s a pretty rigid checklist of hoops to jump through. 

For instance, every school needs to create a committee (with two external members from a similar school), average out test scores for each student for the multiple tests/exams they’ve taken last year and also make sure that the average result of every school doesn’t exceed its “reference” year average—the highest overall performance from the previous three years of board exams. 

If there are no internal marks available for students, CBSE wants schools to conduct a test/exam orally over the phone (!). And the schools have a rather short window to comply with this new marking system.

Source: A CBSE presentation sent to schools

If there was an exam for the most bureaucratic, maze-like process ever, CBSE just topped that.

What irked Sharma—a school-owner himself—most is that CBSE has already collected the exam fees for the year. At Rs 300 crore (US$41 million), it’s not a figure to trifle with. “Didn’t CBSE know there’s still no vaccine for children?” says Sharma.

CBSE’s convoluted assessment system might work. But it’s going to need schools to chip in. Most parents, who send their children to budget private schools, have also demanded significant fee reductions since all learning happened online. So schools are running low on both money and patience. 

There’s one trick that CBSE still has up its sleeve, that could make schools comply—the stick.

 PS: Yesterday, the Board extended the deadline for submission of marks and internal assessments to 30 June.

The government of India is eyeing startup investments by proxy

Six years ago, India set up the National Investment and Infrastructure Fund (NIIF) as a quasi-sovereign wealth fund. Quasi, because usually SWFs are set up by countries with excess money in their coffers. It then tries to generate a decent return with the future in mind. Think of SWFs for the middle eastern countries as a way for them to have money even when oil runs out. In India’s case, without real wealth of its own, it was requesting money from other partners to make its investments. Borrowing from James Guild of The Diplomat, it’s a ‘Sovereign Request Fund’.

And after six years and raising only US$4.5 billion in its funds so far, India’s SWF is trying to take its mandate of making money a bit more seriously.  As per a report by The Economic Times, the NIIF is making its first bet in India’s digital space. And has been in talks with SoftBank backed e-commerce store for infants and kids, FirstCry. A company that is valued at US$2 billion. 

Back up, wasn’t the purpose of the NIIF to make strategic investments that would help in nation-building? Like infrastructure. Well, NIIF has three funds, all with a distinct purpose. 

NIIF Master Fund primarily invests in operating assets in core infrastructure sectors such as transportation and energy. NIIF Fund of Funds invests in funds managed by best-in-class fund managers focused on some of the most dynamic sectors in India such as climate infrastructure, middle-income and affordable housing, digital consumer platforms and other allied sectors. NIIF Strategic Opportunities Fund is a private equity fund which aims to build scalable businesses across a range of opportunity long but capital short sectors.

And now it’s the Strategic Opportunities Fund time to shine, by investing beyond the ‘capital short sectors’. To further that ambition of investing in India’s unicorns, it’s hiring the people to make sure it doesn’t stumble. Yesterday, Livemint reported on NIIF’s new hire.

Padmanabh Sinha, former managing partner at Tata Opportunities Fund, has joined the National Investment and Infrastructure Fund (NIIF) as executive director and chief investment officer of its direct private equity vehicle.


Sinha has more than two decades of experience in the private equity space. Prior to Tata Opportunities Fund, he was the managing partner - India with Temasek Holdings and also served in the role of vice-president at ICICI Venture. He has also served as a chairman of IVCA.

A name that stands out in that list is Temasek Holdings, one of Singapore’s SWFs, with investments over US$12 billion in India, including in restaurant aggregator Zomato and online pharmacy Pharmeasy. 

So it could be a natural progression to see the NIIF cut cheques to some of India’s start-up darlings. After all, SWFs the world over have increasingly been participating in the private equity markets and India doesn’t want to be left behind.

Source: State Street

One problem though, the fund is still too small to make an impact. The government cannot keep pumping money, which it doesn’t have, into the fund. Meanwhile, foreign SWFs make their own investment choices and don’t really need to route investments through the NIIF. 

Finding startups to back might be the easy part for NIIF. Increasing the pool of money will be harder.

That’s a wrap for today.

Hope you’re taking care of yourself, staying socially distant, masking up, and washing your hands frequently.

Write in with your thoughts and observations on how this pandemic is reshaping businesses, societies, and economies. We will be back tomorrow.

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