Scribd Logo
Upload

Welcome to Scribd!

  • 95 views

    Reliance Petroleum's Triple Option Convertible Debentures

    Uploaded by

    mohit85
    Reliance Petroleum issued triple option convertible debentures as part of an IPO to raise funds for a refinery project. The debentures provided three options: retain bonds and warrants and sell warrants, surrender everything, or retain everything including converting warrants to shares. Calculations show the expected rate of return was highest for Option 1 if shares were priced at Rs. 22, and the investor would be indifferent between Options 1 and 2 if shares reached Rs. 27.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd

    Reliance Petroleum's Triple Option Convertible Debentures

    Uploaded by

    mohit85
    95 views12 pages
    Reliance Petroleum issued triple option convertible debentures as part of an IPO to raise funds for a refinery project. The debentures provided three options: retain bonds and warrants and sell warrants, surrender everything, or retain everything including converting warrants to shares. Calculations show the expected rate of return was highest for Option 1 if shares were priced at Rs. 22, and the investor would be indifferent between Options 1 and 2 if shares reached Rs. 27.

    Original Title

    Fm_Ppt

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    PPT, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Reliance Petroleum issued triple option convertible debentures as part of an IPO to raise funds for a refinery project. The debentures provided three options: retain bonds and warrants and sell warrants, surrender everything, or retain everything including converting warrants to shares. Calculations show the expected rate of return was highest for Option 1 if shares were priced at Rs. 22, and the investor would be indifferent between Options 1 and 2 if shares reached Rs. 27.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    95 views12 pages

    Reliance Petroleum's Triple Option Convertible Debentures

    Uploaded by

    mohit85
    Reliance Petroleum issued triple option convertible debentures as part of an IPO to raise funds for a refinery project. The debentures provided three options: retain bonds and warrants and sell warrants, surrender everything, or retain everything including converting warrants to shares. Calculations show the expected rate of return was highest for Option 1 if shares were priced at Rs. 22, and the investor would be indifferent between Options 1 and 2 if shares reached Rs. 27.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 12

    Reliance Petroleum’s

    Triple Option Convertible


    Debentures
    Contents
     Introduction
     Important Terms Used
     The Options
     Calculation of Rate of Return
     Share Price at which the investor would be
    indifferent towards the option
     Conclusion
    INTRODUCTION
     IPO made by Reliance Group, to partly finance
    its Refinery Project.

     Offer to the public amounted to Rs. 8.62


    Billion.

     India’s largest IPO at that time.


     Analysts views on TOCDs: -

     Beneficial to the company as well as the investors.

     They attributed its success to investor friendly image of the


    company.

     It would help Reliance maintain Debt- Equity ratio at 1:1.

     Some felt that TOCDs were not structured.


    Important Terms
     IPO- An initial public offering (IPO) is the first sale of a corporation's
    common shares to public investors. The main purpose of an IPO is
    to raise capital for the corporation.

     Equity- It refers to the raising of funds from the public by issuing


    shares from the equity share capital of the company at face value or
    at premium.

     Bonds- A bond is a certificate of intention to pay the holder a


    specified sum, within a specified date.

     Warranties- A warrant entitles the holder to buy a given number of


    shares at a stipulated price.
    Contd
     Convertible/ Detachable Warrant- A detachable
    warrant is one that can be sold separately from the
    original instrument it was issued with.

     Present Time Value-It is the value of a future stream


    of payments or receipts discounted at a given rate to
    the present time.

     Rate of Return- Is a comparison of the money earned


    (or lost) on an investment to the amount of money
    invested.
    The Options
    Rs. 20 Zero Date- (taken as Opening Date)
    1993- Rs. 60- Rs. 10 After 18 Months
    Rs. 15 After 30 Months (Issue Price)
    Rs. 15 After 36 Months

    6th Yr. Rs. 20


    Non Convertible Bonds @ Rs40 7th Yr. Rs. 30
    8th Yr. Rs. 30
    Contd..
    2 Warrants @ Rs. 10, Premium over Face Value Rs. 10

    Bonds Option 1 Option2 Option3


    Retain Surrender Retain
    Warrants Sell * Surrender Convert

    Outflow Rs.60 Rs.60 Rs.(60 + 40)

    Inflow Rs.(44 + 80 + 10) Rs.(44 + 44) Rs.(80 + 44 +44)

    * Warrants can be sold @ Rs. 5 in Sept’ 97


     Share Price = Rs. 22/- as on Sept’ 97
    Calculation of Rate of Return

    Inflow = Outflow ( 1993- Present Value)

    Using Present Value & Extrapolation: -

    Option 1:

    20 + 10/(1+k)1.5 + 15/(1+k)2.5 + 15/(1+k)3 = 44/(1+k)4 + 20/(1+k)6 + 30/(1+k)7 +


    30/(1+k)8 +10/(1+k)4

    Therefore, k= 17.7% (Approx.)


    Option 2
    20 + 10/(1+k2)1.5 + 15/(1+k2)2.5 + 15/(1+k2)3= 44/(1+k2)4 + 44/(1+k2)4

    Therefore, k2 = 16.32% (Approx.)


    Share Price at which Investors Would
    Be Indifferent towards option 1 & 2.

    Substituting k in respective equations and


    Taking Share Price as Rs.X,

    2X/(1+k)4 + 20/(1+k)6 + 30/(1+k)7 + 30/(1+k)8 + 10/(1+k)4=2X/(1+k2)4 +


    2X/(1+k2)4

    k = 17.7%, k2 = 16.32%

    Solving for X, we get

    X= Rs. 27 (Approx.)
    Conclusion
    At Market Price of Rs. 22/ share, an investor
    should opt for Option 1.

    If Share Price was Rs. 27, an investor would


    be indifferent towards Option 1 & 2

    You might also like