Reliance Petroleum's Triple Option Convertible Debentures (B)

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Case Details:

Case Code : FINC017
Case Length : 7 Pages
Period : 1993-2002
Pub. Date : 2002
Teaching Note : Available
Organization : Reliance Petroleum Limited
Industry : Petroleum and Petrochemicals
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Reliance Petroleum Limited TOCD Issue Contd...

It started commercial production in April 2000. RPL completed its first full year of commercial operations in March 2001, during which it emerged as the largest private sector company in terms of revenues, with sales worth more than Rs 300 billion. The plant utilized 100% of its capacity initially during the initial years and was expected to increase it to 115%. By 2002, RPL had emerged as one of the most modern refineries in the world, using the latest technology, and had the ability to use almost any kind of crude oil.

The refinery had the capacity to process 80,000 tons of crude oil per day and its capital cost per ton was about 40% lower than existing refineries in India. This translated into substantial cost competitiveness. Some of the products like naphtha, reformate and propylene produced by RPL were captively consumed by Reliance Industries Limited4 ensuring sufficient offtake and substantial savings in handling and storage costs. Captive consumption by group companies accounted for approximately 25%-30% of RPL's production. The main products of the company were liquid petroleum gas (LPG), motor spirit/gasoline (MS), naphtha, high-speed diesel (HSD), superior kerosene oil (SKO) & aviation turbine fuel (ATF), fuel oil (FO), coke and sulphur...

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The Need for an Alternative

The holders of the RPL's TOCD issued in 1993 were not allowed to exercise the option of converting TOCD in September 1997, as was promised in the IPO document. This was postponed till May 1998 in order to provide the investors with a new conversion option.

Analysts commented that the need to come up with the new option was prompted by the fact that the non- convertible debenture was trading at around Rs. 48 (Refer Table I) and the two warrants could be sold for Rs 5 each in the market between September 1997 and April 1998, as against shares worth Rs 40 that would be received if the same were to be surrendered. Moreover, RPL's stock price was Rs. 22 (Refer Table II). This meant that the market value of the shares held by an investor opting for conversion in accordance with the initial offer (Refer Exhibit I) in September 1997 was Rs. 44 which was much lower than the combined market value of the non-convertible debenture and the detachable warrants...

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4] Reliance Industries Limited (RIL) is the flagship company of the Reliance group involved in several businesses like petrochemicals, polyestor, textiles etc.


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