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Securitization between Reliance Communications Ltd. and Reliance Jio Infocomm Ltd.: Strategic Financial Analysis*

CASE STUDY, FINANCIAL MANAGEMENT
ET Cases, 12 Pages

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Securitization between Reliance Communications Ltd. and Reliance Jio Infocomm Ltd.: Strategic Financial Analysis

 

“...RCom said that the proceeds from securitisation have been utilised to repay high cost rupee debt, resulting in significant interest cost savings for the company. The securitisation has been completed with Indian and foreign banks. Deliveries of intercity fibre links to Reliance Jio have already commenced. The total deliveries of 1.2 lakh kms intercity fibre under the Agreement are expected to be completed within the current financial year”1

- Press Release, RCom

“...Reliance Jio Infocomm Ltd. and Reliance Communications Ltd. today announced the signing of a definitive agreement for sharing of RCOM’s nationwide telecom towers infrastructure. The agreement provides for joint working arrangements to configure the scope of additional towers to be built at new locations to ensure deep penetration and seamless delivery of next generation services. Reliance Jio Infocomm Ltd. and Reliance Communications Ltd. to derive major benefits from sharing of capital and operating cost.”2

– Press Release, Reliance Industries Limited.

 

In April 2013, Reliance Communication Ltd (RCom) completed its 1,200 crore Inter-city Fibre Agreement with Mukesh Ambani-led Reliance Jio Infocomm Ltd (RJio).3 Under the agreement, RCom had to deliver 120,000 kilometres intercity fibre links to RJio.4 The deal involved Indian and foreign banks acting as SPV for the securitization process.

Securitization is a procedure through which an organization/company merges its different financial assets/debts to form a consolidated financial instrument which is later issued to investors.5 The investors get benefit in the form of interest in return. Securitization is thus transformation of an illiquid asset into a security.6 There are various steps in the securitization process. The process starts with lender such as homeowner or corporation initiating loan. Then securitization structure is added. A Special Purpose Vehicle (SPV) comes into picture once the firm allocates certain assets like consumer receivables. This structure is legally protected from management. Also credit rating agencies review the securities that are to be floated for investors. The SPV issues debt, divides the benefits as well as the risks among investors (Exhibit I)....................

 


 1 “RCom gains after completing securitization of a transaction“, http://www.business-standard.com/article/news-cm/rcom-gains-after-completing-securitization-of-a-transaction-113071100406_1.html, July 11th 2013 (accessed date:Feburary 5th 2016)
2 Reliance Industries Limited, “Press Release“, http://www.ril.com/getattachment/7b6a70bb-9eed-4ad4-864ab72222f80de5/RELIANCE-JIO-INFOCOMM-AND-RELIANCE-COMMUNICATI-%281%29.aspx, June 7th 2013 (accessed date:Feburary 5th 2016)
3 Rudradeep, “Telecomtalkinfo.com“, http://telecomtalk.info/rcom-completes-securitization-of-rs-1200-cr-inter-city-ofc-dealwith-reliance-jio/107261/, July 12th 2013 (accessed date: February 5th 2016)
4 Reliance Communications Limited, “Transcript of Earnings Conference Call for the Quarter ended September 30, 2013”,http://www.rcom.co.in/Rcom/aboutus/ir/pdf/RCOM-2QFY14-Earnings-Call-Transcript.pdf, November 13th 2013 (accessed date: Feburary 7th 2016)
5 The Economic Times, “Definition of Securitization”, http://economictimes.indiatimes.com/definition/securitization (accessed date: February 8th 2016)
6 Prof. Ian Giddy (Stern School of Business), ”The Securitization Process“, http://people.stern.nyu.edu/igiddy/ABS/absprocess.pdf (accessed date: February 8th 2016)

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Securitization between Reliance Communications Ltd. and Reliance Jio Infocomm Ltd.: Strategic Financial Analysis

 

Synopsis

India is the second-largest telecommunications market and the third-highest number of internet users in the world. The Indian mobile sector is growing rapidly and contributes substantially to India’s GDP. Thus Telecom Service Providers (TSPs) play crucial role in Indian economy. Other industries also depend on telecom industry. There is a positive correlation between mobile penetration and GDP growth in the economy.

In order to expand, TSP bought spectrum from Govt at a very high cost. As a result, TSPs were ridden with a high financial burden and repayment of debt became the major concern. At a time when TSPs were actively searching for opportunities to repay debts, securitization was used by Reliance Communications Ltd. (RCom) to overcome the issues related to debt and interest payment.

Securitization refers to raising money by providing some collateral with lenders. In a securitization process, an illiquid asset is converted into a security against which a company can raise funds from financial institutions. The funds so raised can be used by company for its strategic use and the financial institution has the right on the cash flow of the asset.

This case study discusses securitization process of RCom with Reliance Jio Infocomm Ltd (RJio). RCom has completed securitization of proceeds under the INR1,200 crore inter-city fibre agreement signed with RJio in April 2013. The proceeds from securitization have been utilized to repay high cost rupee debt, and thereby save interest cost on such debts. The company had raised foreign debt however its value increased due to foreign exchange impact of depreciating rupee. This securitization has been completed with Indian and foreign banks. The case study will discuss strategic aspects of the company and its impact on finance. It will cover systematic and unsystematic risks of the company and use of securitization process to overcome certain issues........................

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Abstract

India is the second-largest telecommunication market and has the third-highest number of internet users in the world. The Indian Government auctioned 3G/BWA spectrum and collected approximately INR1.06 lakh crore in 2010 and INR1.10 lakh crore in 2015 from Telecom Service Providers (TSPs) who raised debts from banks and other financial institutions to support investment in spectrum auction. For TSPs, this has resulted into huge debts and financial issues such as low profits, poor cash flows and valuations. The repayment of debt was a major concern for most of the operators. TSPs were searching for opportunities to raise cash flows to repay debts.

Reliance Communications Ltd. has made use of the securitization process to overcome the issues related to debt and interest payment. This case study discusses the securitization process used by Reliance Communications Ltd. (RCom) with Reliance Jio Infocomm Ltd. (RJio). The proceeds from securitization have been utilized to repay high cost rupee debt, and saving interest cost on such debts. The case study will discuss strategic aspects of securitization for the company and its impact on finance.


Pedagogical Objectives

The case study can be used to understand the following concepts/theories in Strategic Finance:

  • To understand the concept of securitization, its relevance in India and how it was used by RCom and RJio as a financial strategy for future growth
  • To understand the role of PESTEL factors and SWOT analysis in strategic decision making
  • To understand financial implications of the strategy on a business by discussing impact of securitization as a means of raising funds and its impact on financial statements

Case Positioning and Setting

This case study, as a pedagogical tool, can be used in either of the following:

  • MBA program – Strategic Finance course – To understand the concept of securitization and its significance as a financial strategy
  • Executive Education programs/MDPs – To sensitize the participants to the importance of securitization and its impact on the financial position of the company


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