The Gigantic Deals
Reliance Industries Limited had announced a hot streak of 14 new investors in its JIO Platforms between April to July. The fastest ever in India. The company raised a sum INR 1,52,318 crore by selling a 33% stake in JIO Platforms. So, how much tax did Reliance Industries or JIO Platforms end up paying? Let’s have a look at The Reliance Tax Saving Plan.
| Shareholding | Shares Held (in cr.) | Value (in cr.) | Stake (%) |
| Reliance Industries | 18,055.7 | 180,557 | 67.05 |
| Facebook Inc. | 2,407.4 | 43,574 | 9.99 |
| 1,863.9 | 33,737 | 7.73 | |
| Silver Lake | 277.8 | 5,656 | 1.15 |
| Silver Lake (additional) | 223.3 | 4,547 | 0.93 |
| Vista | 558.2 | 11,367 | 2.32 |
| General Atlantic | 324.1 | 6,598 | 1.34 |
| KKR | 558.2 | 11,367 | 0.93 |
| Mubadala | 446.6 | 9,094 | 1.85 |
| ADIA | 279.1 | 5,684 | 1.16 |
| TPG | 223.3 | 4,547 | 0.93 |
| L Catterton | 93.0 | 1,895 | 0.39 |
| The Public Investment Fund | 558.2 | 11,367 | 2.32 |
| Intel Capital | 93.0 | 1,895 | 0.39 |
| Qualcomm | 35.9 | 730 | 0.15 |
source: Bloomberg
JIO’s total equity as of March 2020 comprised of
- Equity share capital at INR 4,961 crore
- Other equity at INR 1,77,064 crore
- Total INR 1,82,025 crore
‘Other equity’ means OCPS (Optionally Convertible Preference Shares) issued to RIL. But, the stake sales were ‘not’ structured as a transfer of shares from RIL. In other words, OCPS held by RIL in JIO was not converted to equity shares for the investors. Also, dilution of earlier shareholders (except RIL) did not happen when shares were issued to new investors.
The Tax Saving Plan of Reliance
Normally these partnerships would have led Reliance to pay huge capital gains tax. JIO was incorporated in November 2019. Therefore, the gains would have been categorized as short term capital gains. JIO had a plan of becoming net-debt free. And paying these taxes wouldn’t have helped at all.
Here is what Reliance did:
- Reliance invests nearly INR 1,80,000 cr. in Reliance Jio. This is transferred at the same value to Jio Platforms Ltd. (evidently at cost value).
- Jio Platforms pays for it with the help of a loan from Reliance Industries. This loan was structured as OCPS or Optionally Convertible Preference Shares. In other words, a loan that can be converted to equity.
- When companies invest in Jio Platforms, Jio Platforms pays back Reliance Industries and redeems the OCPS. This will not lead to any tax liability as it’s just paying back of the loan earlier taken.
Note 1: Reliance is not creating any tax liability by transferring shares to JIO Platforms according to this ITAT ruling. This ruling states that the transfer of shares to a 100% subsidiary is exempt from taxes.
Note 2: Also, according to Section 47A, ‘Reliance has to pay taxes if there’s a profit’ since ‘it is no longer a 100% subsidiary’ (after all the partnerships). But it appears that Reliance keeps reducing its stakes in Reliance Jio and still gets paid. Hence it is just getting back its investment. It doesn’t have to pay any taxes, too. The actual profit is basically sitting in the remaining 68% stake of Reliance on Jio Platforms. This leads to zero taxable profit in the transaction.
This is how Reliance got repaid a chunk (INR 1,29,046 crore) of its OCPS, thereby, reducing its net debt position. Also, JIO Platforms retained a large portion (INR 23,272 crore) of its funds for future purposes.
Sources: Thehindubusinessline, CapitalMind