Investing in RIL an act of faith

60% of net cash from operations spent on associates, subsidiaries.

Investing in Reliance Industries Ltd (RIL) is, in many ways, an act of faith. Investors in RIL during the last two years have seen 60 per cent of their company's net cash from operating activities going into supporting associate and subsidiary companies.

However, there is often no clarity about the terms of these investments and the yield to investors. Funds have been routed through investment companies that lack transparency and whose accounts are not readily available to investors.

Changes have also been made in the terms and conditions of investments without informing investors. For example, RIL has invested Rs 1,600.02 crore in deep discount bonds of Reliance Communications Infrastructure Ltd, which is one of its arms for investment in Reliance Infocomm.

But the maturity value of these instruments has changed from Rs 100,000 each on March 31, 2003, to Rs 68,550 each on March 31, 2004. No explanation has been offered for the change.

Similarly, the interest on RIL's investment in Reliance Industrial Investments and Holdings Ltd has been changed from 6.5 per cent to 0 per cent with effect from April 1, 2003.

Of RIL's holdings of 315,000,000 equity shares of Reliance Infocomm Ltd, RIL has extended a negative lien on 160,650,000 shares to banks in return for a loan to an unspecified associate company.

Asked about all these and other questions, a senior Reliance Industries group executive said he could not comment offhand on numbers.

The company's annual reports show that RIL's investments in subsidiaries and associates went up from Rs 3,443.22 crore on March 31, 2002, to Rs 13,609.28 crore two years later.

The bulk of this increase was on account of the Rs 8,100 crore invested in the preference shares of Reliance Infocomm, the group's telecom venture. Another Rs 2,331 crore went into equity shares of Reliance Communications Infrastructure Ltd.

Outstanding balances in loans given, advances made and deposits made by RIL in its subsidiaries and associates went up from Rs 7,874.48 crore to Rs 8,459.92 crore between March 31, 2002, and March 31, 2004.

The main borrowers on March 31, 2004 were Reliance Industrial Investments and Holdings (Rs 794.22 crore), Reliance Ventures Ltd, (Rs 4,900.92 crore), Reliance Power Ventures Ltd (Rs 1,396.50 crore). All three companies are 100 per cent subsidiaries of RIL.

While these companies are essentially investment arms of RIL, the ordinary investor will find it exceedingly difficult to trace where the money has gone. Reliance Industrial Investments and Holdings, for instance, holds the remaining value of RIL's holdings in the now-merged Reliance Petroleum.

The value of Reliance Industrial Investments and Holdings' investment in RIL is Rs 1,654.96 crore. These shares have now been parked in the Petroleum Trust and Reliance Industrial Investments and Holdings has been named "the sole beneficiary of the trust".

Yet the RIL balance sheet shows the value of Reliance Industrial Investments and Holdings' investments as Rs 1,874.03 crore, which indicates the company has also invested elsewhere.

Reliance Power Ventures is the vehicle for RIL's holdings in Reliance Energy and Reliance Ventures for the group's holdings in Indian Petrochemicals Corporation.

On March 31, 2004, Reliance Power Ventures' investments accounted for Rs 1,444.42 crore and Reliance Ventures had investments of Rs 1,414.88 crore.

While these companies are RIL's vehicles for investing in Reliance Energy and IPCL, respectively, the investor has no clarity on whether these companies' entire investments are in these companies. In the absence of these details, investors are unable to gauge the return they are getting on their investments.

There are other issues. On March 31, 2004, RIL had also invested in Rs 86 crore worth of 6 per cent cumulative redeemable preference shares of Reliance Enterprise Ltd, which, in turn, has invested Rs 158.39 crore in RIL.

It is unclear how this circular investment benefits RIL shareholders. Similarly, RIL had invested Rs 485.80 crore in Reliance Capital, which, in turn, invested Rs 109.70 crore in RIL.

RIL has also lent Rs 794.22 crore to Reliance Industrial Investments and Holdings, which, as mentioned above, holds equity in RIL through the Petroleum Trust.

It has also lent to Reliance Industrial Infrastructure Ltd, which, in turn, holds equity in RIL and preference shares in Reliance Infocomm.