How JIO raised billions with no Tax?

Jorden & Sky Special 

Two most discussed topics in India during the period of April 20 to July 20 was

1. Is the COVID curve flatten in India?
2. How is JIO managing to raise so much money?

Today we are going to touch the second point with a pinch of taxes in the angle.

Well, the topic for today’s discussion is How RIL and Jio Raised billions without paying any taxes?

In Simple language, Taxman Says that when you sell any capital assets then you have to pay taxes…

Between April 22 and July 15 this year, Reliance Industries Ltd (RIL) announced the largest, fastest fund-raise more ?1.5-lakh crore through a stake sale of about 33 percent in its subsidiary Jio Platforms to 13 marquee foreign investors.

Let’s understand a few terms before deep diving. Alert – Don’t skip this

Capital Gain tax structure

Any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain or profit comes under the category ‘income’, and hence you will need to pay tax for that amount in the year in which the transfer of the capital asset takes place. This is called capital gains tax, which can be short-term or long-term depends on the duration of holding of assets.

Optionally Convertible preference shares also know was OCPS

Non-cumulative optionally convertible preference share is one wherein a shareholder has the option of converting his preference shares into common shares at and within a predetermined date,

Here’s how Raising funds and issuance of share works, Suppose Company A is raising money from Company B then company A will issue either Equity Shares to Company B or OCPS to Company B.

Ok, let’s get to the deal now, Its going to be complex so be with us till the end..

Jio Platform’s total equity as of March 2020 comprised equity share capital (?4,961 crores) plus other equity (?1,77,064 crore). This ‘other equity’ was optionally convertible preference shares (OCPS) issued to RIL as RIL was pumping money in the JIO Platform

It was earlier believed that when investors bought a 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 — or, so it was thought.

But this arrangement would have left RIL liable to pay capital gains tax as it would have sold equity shares converted from the OCPS to the investors at a premium. The gains on such transfer of securities would have been categorized as short-term (taxed at the highest applicable rate, in excess of 30 per cent), given that Jio Platforms were incorporated only late last year. Not a nice situation for RIL

The potential tax pain seems to have been side-stepped by a simple method — the fresh issue of shares by Jio Platforms to the various investors. To Facebook & Google Jio issued both equity shares and 0.01 per cent CCPS (compulsorily convertible preference shares) at ?488.34 per share. 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(see table for break-up).

One stone, many birds

This fresh issue of shares by Jio Platforms helped kill many birds with one stone.

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.

Since 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 and Even if the shares’ sale price was higher than the fair value, the tax law provides concessions if the buyer is a non-resident investor.

On that note, we hope you share this story on WhatsApp, Twitter, or LinkedIn because hey… It’s about JIO. Who wouldn’t right?