Daybreak - Reliance Retail shows why the unlisted market is not for the fainthearted

Episode Date: July 16, 2023

From Rs 400 per piece in 2019, the shares of Reliance Retail, went up to Rs 4000 by 2021 in the unlisted market. Reliance Retail is India’s largest operator of supermarkets, apparel outlets, and electronics stores. And its shares were the hottest cake in the grey market for a while.Many investors expected it go go for a public listing until a little more than a week ago when Mukesh Ambani threw in a surprise. The company said it would effectively cancel the holdings of its minority investors and offer them Rs 1,362 per share. Basically, Reliance Retail had cancelled its shares held by minority investors leaving them shocked and confused.What made the company take this decision? And what should retail investors learn from this?  Tune in.RecommendationWhy investors are buying what Reliance Retail is sellingDaybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too? It's for a special announcement. For the last few months, I and Sita Ramon, Ganesh, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get an alert as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcasts or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. From 400 rupees per piece in 2019, the shares of Reliance Retail went up to 4,000 by 2021 in the Unlisted Market. As many of you may already know, Reliance Retail happens to be India's largest operator of supermarkets, apparel outlets and electronic stores.

You could even say that its unlisted shares turned the grey market into a sort of a gold rush. Of course, there were others too, but Reliance Retail was undoubtedly the hottest cake in the market for a while. As recently as the year that ended in March, Reliance Retail was. second only to the National Stock Exchange of India or NSC. This is by value of shares traded on Unlisted Zone, which is a platform for buying and selling unlisted stocks. But you know how Mukay Shambani loves surprising his investors? And it's not always in a good way.

And shareholders of Reliance Retail know this better than anybody else right now. A little more than a week ago, Reliance Retail said that it was, would effectively cancel the holdings of its minority investors and offer them 1,362 rupees per share. Basically, the company was telling its minority investors that their shares were going to be cancelled. As you can imagine, the news came as quite the blow. It left many confused.

And one thing that they failed to understand was that at the time of the announcement, Reliance Retail shares were trading in the unlisted market at over twice that price. Most of these investors were under the impression that Reliance Retail would be taken public. But what they did not realize is that its parent has more chances of going for an IPO. So what made the company take this decision and more importantly, what should retail investors learn from this? Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nidda Sharma, and I don't chase the news cycle. Instead,

thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. Today is Monday, the 17th of July. Sita Raman and Anand from the Ken came up with a perfect analogy to explain the dangers of trading in the unlisted market. Betting on unlisted companies, they say, is like trying to solve the Rubik's Cube blindfolded when you couldn't have even done it with your eyes open. There are no quarterly financials or disclosures on who the shareholders are for these unlisted companies, nor are there any analysts who can tell where the company is headed based on conversations with its management. Unlisted companies file their annual financials

anywhere from a few months to a year after the end of the fiscal. So if you want to see how the company's price to earnings ratio compares to another listed peer, you have to manage with not-so-recent numbers. That obviously makes the whole comparison very flawed. Reliance retail's numbers are technically made available by Reliance Industries in its quarterly disclosures. But in recent years, it has chosen not to give out important data related to the company. Anan and Sita Raman spoke to Sandeep Gennodia, the chief executive of Altius InvestTech, about the unlisted market. He told them how there was a lull in the unlisted market after people burnt their fingers in the pre-IPO shares of Ptm and Policy Bazaar.

Talking about Reliance Retail's share cancellation, he said, and I'm quoting, it was just starting to recover and now this has happened. So you see, investing in the grey market or privately held companies is not everybody's cup of tea. It comes with working with little to no essential information on these companies. Investor protection is always on shaky grounds in these scenarios. And what happened to Reliance Retail investors is evidence to prove all this. So let us try to understand this unlisted market a little better. Stay tuned.

There are three types of companies in the unlisted market. The ones that typically see a lot of investor interest are those which are preparing to raise funds through an IPO. For example, the product engineering company Tata Technologies Limited. For its public issue, it filed the offer document with the regulator in March, but its shares have been trading since at least mid-2021 in anticipation of the IPO. Then, there are companies that haven't stated any plans to go for listing. A popular unlisted stock that falls in this category is IPL's Chennai Super Kings. And finally, there are companies whose shares traded on the stock market in the past,

like the IT company called Hexaware Technologies Limited that delisted in November 2020. But its shares are still available for potential investors since not all of its shareholders gave up their stake during the delisting process. These stakeholders may have been unhappy with the price or they were so enthusiastic about its long-term prospects that they were willing to stay invested and sell their shares later in the unlisted market. Reliance retail belongs somewhere between Tata Technologies

and Chennai Superkings. And this is where things start to get interesting. coming up next, how many reliance retail investors may not have done their homework properly before putting in their money in the company. The Ken had a conversation with Krishna Ram, a Mumbai-based investor and trader, and it explained a lot about what might have happened to many of Reliance Retail's investors. Ram had no idea that Reliance Retail is not the same as Reliance. Retail Ventures Limited, which is commonly known as RRVL.

Actually, RRVL is Reliance Retail's parent company. So Ram told us, and I'm quoting, I thought Reliance Retail would launch an IPO in a year or two, or there would be a demurger. So he bought an undisclosed number of Reliance Retail shares at $3,180 each in March 2022. Now, his investment is down by almost 60%. So when did all the stock of a potential IPO for Reliance's retail business actually start?

It was when Reliance Industries raised more than 47,000 crore rupees by selling over 10% to a clutch of top-tier private equity firms and sovereign wealth funds back in 2020. The thing is, this fund raise happened in RRVL and not Reliance Retail. And since this fundraise, Reliance has said nothing about the IPO of its retail business or which entity will be listed.

But based on simple logic, it is probably going to be RRVL that will go public, not Reliance Retail, because after all, those financial investors need to be given an exit. But Manandoshi,

the co-founder of Unlisted Arena, which is another platform that facilitates trading in the shares of privately held companies raised a good question. He said, if Reliance wanted to take Reliance Retail public, why would they cancel the shares held by the public and then issue them again? The answer to that is that it is possible that Reliance Industries wanted Reliance Retail to be a fully owned subsidiary of RRVL at the time of RRVL's IPO. But for those like Ram, who bought into the company at higher prices, this does not offer much comfort.

Even though he did admit that in hindsight, he may have paid too much. Just last to last week, Reliance Retail's valuation, as per the price of shares in the grey market, was $166 billion, which is considerably less than Reliance Industries' $230 billion market capitalization. But just over a year ago, Reliance Retail was worth more than Reliance Industry is limited. Plus, the valuation for Reliance Retail also seems a bit unrealistic. In May this year, the global brokerage firm Sanford C. Bernstein had estimated that Reliance Retail's business was worth nearly $105 billion. This $105 billion is in line with a $92 to $96 billion valuation,

the two consultants reportedly gave Reliance Retail. So you see how many times, such as in the case of Reliance Retail, the unlisted market can be quite detached from actual reality. But you know what? There is a good chance that all this may be forgotten when there is a revival in IPOs and investors try to grab a piece of companies before they go public. After all, like Sita Raman and Anand say,

Even at the risk of losing your shirt, it is hard to say no to the prospect of juicy profits. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website. I am Sniqa Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.