A REPORT ON PROJECT FINANCING OF RPL AND PRE AND POST MERGER VALUATION OF RIL - RPL

By SWATI GOENKA
(08BSHYD0871)

RELIANCE INDUSTRIES LIMITED
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A REPORT ON PROJECT FINANCING OF RPL AND PRE AND POST MERGER VALUATION OF RIL - RPL

By SWATI GOENKA
(08BSHYD0871)

ICFAI BUSINESS SCHOOL
MAY 15, 2009
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AUTHORISATION
This report has been authorized by PROF AJIT PATIL as a part of the evaluation for SUMMER INTERNSHIP PROGRAM. This report has been submitted as a part of partial fulfillment of the requirements of the MBA program of ICFAI Business School.

Authorizing Person (Prof. Ajit Patil)

Date: 15/5/2009

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ACKNOWLEDMENT
I would like to take this opportunity to thank all those who have made working on this project feasible for me. I would first like to thank „Reliance Industries Limited’ for providing me with the opportunity to work with them and giving me my first taste of the real corporate and professional world. It gave me an opportunity to understand the real life situations and implement all those things which I had earlier only come across in textbooks as part of my course. I would also like to extend my sincere gratitude to my guides, Mr. K.R. Raja and Mr. Hariharan Mahadevan for allowing me to work under their able guidance. Without their guidance, help and support this project would not have been possible. I extend a special thanks to Mr. Ritesh, for helping us thoroughly in the day to day working and the project. Also, I would like to thank my faculty guide Prof. Ajit Patil for his able guidance and support. Last but not the least; I would like to thank my colleague Tanya Bhardwaj (Inte rn), without whose support, co-operation and suggestions, this project could not be completed.

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TABLE OF CONTENTS PARTICULARS
Authorization Acknowledgement Abstract 1. Introduction 1.1 Purpose and Scope 1.2 Limitations 1.3 Methodology 2. Industry Overview 3. Business Overview 4. Long Term Sources of Finance 4.1 Capital Market 4.2 Different Kinds of Equity Issue 5. Initial Public Offer 5.1 Intermediaries Involved in IPO 5.2 Considerations Before Deciding for An IPO 6. IPO by an Unlisted Company 7. Pre Issue Obligations 8. Terms of Issue 9. Pricing by Companies Issuing Securities 10. Promoter’s Contribution & Lock In Period 11. The Issue 12. Objects of the Issue 13. Basis for Issue Price 14. SEZ & Tax Benefits 15. Stock Movement in 2006 16. External Commercial Borrowings (ECB) 17. Eligible Borrowers 18. Recognized Lenders 19. Average Maturities for ECB 20. RPL Debt 21. Interpretations 22. Portfolio Tracker Version 0.0 23. Merger of RPL with RIL

PAGE NO.
3 4 9 12 13 15 16 17 22 25 26 27 29 31 33 34 36 37 38 41 44 46 48 51 52 58 59 60 61 62 63 83 88
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24.

25. 26. 27. 28. 29.

23.1 Synergy of merger 23.2 Swap Ratio 23.3 Investors Position 23.4 Stock Position 23.5 Analysts take on the merger Valuation of RIL and RPL 24.1 Valuation of RIL 24.2 Valuation of RPL 24.3 Study of stock prices of RIL & RPL 24.4 Weighted Average Cost of Capital 24.5 Free Cash Flow to Equity 24.6 Free Cash Flow to Firm Findings Conclusion Recommendations Declaration References

91 92 95 97 99 104 116 121 124 127 130 132 133 135 136 137

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LIST OF ILLUSTRATIONS

LIST OF TABLES

PARTICULARS Table 1: World Refining Capacity in MMBD Table 2: World demand growth in MMBD Table 3: GDP Billion US$ (ON PPP BASIS) Table 4: Proposed Funding for RPL Table 5: Lead Managers to size of issue Table 6: Pre Issue Shareholdings Table 7: Capital Structure Table 8: Issue Details Table 9: Estimated Expenses Table 10: Estimated Expenses of Issue Table 11: Comparison with Domestic Peers Table 12: Debt Raised by RPL Table 13: Dilution of Promoters Table 14: Swap ratio

PAGE NO. 19 19 20 23 36 41 42 44 46 47 49 62 93 96

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LIST OF FIGURES

PARTICULARS Figure 1: Refining Requirement Forecast Figure 2: Different Kind of Equity Issue Figure 3: Book Building Process Figure 4: MRPL Stock Movement Figure 5: BPCL Stock Movement Figure 6: HPCL Stock Movement Figure 7: RIL Stock Movement Figure 8: RPL Stock Movement Figure 9: RPL Details Figure 10: Stock Position of RIL Figure 11: Stock Position of RPL Figure 12: Operating Profit per Share Figure 13: Percentage Growth Figure 14: Book Value per Share Figure 15: Gross Profit Margin Figure 16: Gross and Net Profit Margin Figure 17: Return on Net Worth

PAGE NO. 21 27 40 52 53 53 54 55 56 97 98 105 105 106 107 108 108

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ABSTRACT
Refinery project requires huge investments for the setting up the refining plant. Hence, the long term sources of finance like raising funds through equity shares and raising long term secured debt are more viable. Reliance Petroleum Limited (RPL) to fund its operations opted for long term sources of funds namely equity and debt. The report aims at understanding various guidelines and processes involved for raising the long term funds through a case study of RPL. The capital cost of RPL‟s project was estimated at Rs. 270 billion. The project was funded through debt (Rs. 157.5 billion) and equity (Rs 112.5 billion). As one of the means for raising Equity funds, RPL went for an Initial Public Offer (IPO) through the book building process. The Company issuing Equity through IPO has to fulfill certain guidelines (rules and regulation) issued by SEBI under Section 11 of the Securities and Exchange Board of India Act, 1992. The guidelines are called Disclosure and Investor Protection Guidelines (DIP). To raise funds through debt (External Commercial Borrowings in case of RPL) guidelines of the Reserve Bank of India for External Commercial Borrowings need to be complied with. ECB can be accessed under two routes. They are – Automatic Route and Approval Route. RPL raised debt through Approval Route for a new project having a term o f 9 years and 7 months. Reliance Debt Document is one of the finest example of Debt Agreement as it discusses the rights and obligation of all the parties involved (the borrower, Commercial Lender and the Commercial Facilities Agent) in all the possible situations. These Debt documents are comprehensive in nature and generally cover all the possible circumstances. Apart from long term sources of finance, the report explains the functionality of a software named Portfolio Tracker Version 0.0. Portfolio Tracker can help in calculating the gain or loss on the stocks of a portfolio. This software pulls the current prices of the shares from NSE and BSE sites at a definite interval. It compares the current price with the purchase price and hence calculates the profit or loss on the stock. This software is made using the functions of Microsoft Excel 2007.
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In the second part of the report, an attempt has been made to understand the facts of recent RIL – RPL amalgamation, which was announced on 27 th February 2009 and took place on 1st April, 2009. The report discusses the swap ratio of 1:16 that has been decided by the Board of Directors of RIL for the merger. This ratio is marginally in favor of the shareholders of RPL, would mean a dilution of 4.4% of RIL‟s equity. Moreover, the position of the shareholders of the two companies has also been looked at and the factors which can affect the shareholder‟s investments decisions have also been analyzed. RIL will be benefitted from certain financial and operational synergies arising out of the merger of RPL with RIL.

To understand the probable course of action for investors, the valuation of two companies has been done. This facilitates the investors in making the decision for investment in RIL after the amalgamation of RPL. The financial ratios of RIL state that the company is in good financial health. It shows Earnings per Share of Rs. 133 with a Dividend per Share of Rs 13 in 2007-08. The company‟s liquidity ratio reveals that the company has considerable amount of cur rents assets and can very well pay off its current liabilities through it.

The financial ratios of RPL, though do not canvas a very clear picture of financial health of the company. This is because the company has started its operation on 15 th March, 2009. Hence only 15 days operational data has been made public. Currently the company has been highly leveraged as D/E Ratio for the company is 0.95:1. This is because RPL is a new project and requires heavy machinery.

The free cash flows measures how much amount of cash can be paid to the equity shareholders of the company after the payment of all the expenses, reinvestment and debt repayment. Free cash flows can be classified as Free Cash Flow to Equity (FCFE) and Free Cash Flow to the Firm (FCFF). RIL has positive figures for FCFF and FCFE which indicates sound financial position of the company. The figures for RPL are negative because the company has only recently started production (only 15 days of production till March 2009). Further, the weighted average cost of capital has been calculated for both the companies depending on the volatility of its shares at the stock market. Last one year‟s data has been taken to calculate the variance and standard deviation. The RIL stock prices are more volatile when
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compared to RPL. Thus the cost of equity for RIL is higher than Reliance Petroleum. Similarly, the cost of debt is compared based on the financial charges based over the total value of debt. The cost of debt is little higher for RPL 5.96 than that of RIL‟s 4 .55. But as RPL is better leveraged than RIL and the cost of equity (Ke) is higher than cost of debt (Kd), the WACC for RIL is higher than RPL. As RIL has a higher WACC, the valuation of RPL is better when compared to RIL (in respect of WACC).

Thus, RIL seems to be a little riskier investment than RPL. But from the past records of RIL, it has proved to be an ever growing company. Its financial records speak very well of the financial health of the company and shows that RIL has been a profit making company since its inception. The credit for the profits of the company goes to its various subsidiaries, which have been compensating for each other‟s losses through their profits.

Thus, numbers might term RIL to be a riskier firm when compared to RPL. But on papers, RIL is a much stronger company and shows a bright future. The past profits of the company second the statement of RIL being an intelligent investment.

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INTRODUCTION
ABOUT THE COMPANY The Reliance Group was founded by Late Sh. Dhirubhai Ambani a nd today it is India's largest private sector enterprise. The flagship company, Reliance Industries Limited, is a Fortune Global 500 company and is the largest private sector company in India. For Reliance, backward vertical integration has been the cornerstone of the evolution and growth. It started with textiles and ever since Reliance has pursued a strategy of backward vertical integration in polyester, fiber intermediates, plastics, petrochemicals, petroleum refining and oil and gas exploration and production. Exploration and production of oil and gas, petroleum refining and marketing, petrochemicals (polyester, fiber intermediates, plastics and chemicals), textiles, retail and special economic zones has been the core activities of the Group. Reliance enjoys global leadership as the largest polyester yarn and fiber producer. Also, it is amongst the top ten producers of the petrochemical products in the world. Major Group Companies are Reliance Industries Limited (including main subsidiaries Reliance Petroleum Limited and Reliance Retail Limited) and Reliance Industrial Infrastructure Limited. PURPOSE OF THE REPORT The Final Report is the written component of the evaluation of the internship. This report contains the work done by me during my three months o f internship with RELIANCE INDUSTRIES LIMITED. This report is an attempt to document the analysis and leanings made by me during the period. This report will help the Faculty Guide Mr. AJIT PATIL and the Company Guide Mr. K. R. RAJA and Mr. HARIHARAN to understand my work.

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SCOPE OF THE REPORT As a part of the MBA program, I have undergone an industry internship with M/s Reliance Industries Limited to understand the practical applications of various financial instruments, transactions, processes and administration of the finance function. To achieve this objective, my company guide advised me to study the project financing for Refinery and Polypropylene plant being developed by Reliance Petroleum Limited (RPL), a subsidiary of RIL. Based on this study, I am expected to learn, in detail, the long term financing of the project and use this knowledge for related treasury and finance functions of the company like debt servicing, compliance of financial covenants, Accounting, MIS and filing of reports. The report discusses about Long Term Sources of Finance, factors which determine the requirement of long term sources of funding and sources of raising them. It also includes the study of equity and debt in detail. It discusses the pros and cons of different types of long term fund raising methods. The report further includes the detailed study of Initial Public Offering (IPO) including its preissue obligations as mentioned by Securities and Exchange Board of India (SEBI). It states the Book building process for deciding the issue price. Once there is a general understanding about the IPO, the report goes deep in the IPO process of Reliance Petroleum Limited and mentions specific SEBI guidelines for raising funds through IPO, which were compiled by RPL. The report also mentions the debt raising process and External Commercial Borrowing Guidelines. The report discusses the various covenants and clauses that are included in debt agreements. It broadly discusses the roles and responsibilities of various parties involved in debt agreement in light of RPL‟s Commercial Term Agreement. The report also includes the details of PORTFOLIO TRACKER VERSION 0.0 which helps investors to monitor various stocks in their portfolio at a specific period. The report contains the information about the various functionalities of the Microsoft Excel driven software. Further, to understand the current happenings in the Reliance Industries Limited, my company guide and the faculty guide suggested me to follow the recent merger of RPL with the company. This helped me in understanding the concept of merger and amalgamation. This also helped me
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in analyzing the swap ratio decided by the board members of the Reliance Industries. The report also discusses the analysis of various analysts on the idea of merger and further the declared swap ratio. A calculation has been done to study the impact on the promoter‟s holding in the RIL after the amalgamation of RPL as the stated ratio of 1:16. In order to understand the various options available to the investors of RPL and RIL, the valuation of both the companies has been done. As a part of valuation the previous 5 year data has been used for RIL to estimate its future financial statistics. Percentage of Sales method has been used for estimation of the future financials. After the estimations, various financial ratios like liquidity ratios, leverage ratios, payout ratios, coverage ratios etc. have been calculated and analyzed in order to study the financial health of the company. However, due to the lack of the historic data for Reliance Petroleum Limited, 15 days production data has been extrapolated to estimate the year‟s data. This data has been used to estimate the future financials of the company. The growth of sales has been estimated by estimating the GDP growth rate of India and the utilization capacity of the refinery. The report also deals with the historic data of stock prices of RIL and RPL in consideration with Nifty Index for last year, starting from 1 April, 2008. This data has been used to find out the annual return, standard deviation and volatility of the stocks of these companies. This volatility helps in calculating the cost of equity. Further, by using the cost of equity and cost of debt, weighted average cost of capital is calculated for both the companies. The valuation of the company is also discussed based on the result of WACC. The free cash flows for both the companies have also been calculated which measures how much amount of cash can be paid to the equity shareholders of the company after the payment of all the expenses, reinvestment and debt repayment. Free cash flows can be classified as Free Cash Flow to Equity (FCFE) and Free Cash Flow to the Firm (FCFF). These cash flows are indicators of the financial position of the company.

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LIMITATIONS 1. While analyzing the prospectus of Reliance Petroleum Limited, I understand t hat the price band for the book building process was decided by management of the company in consultation with the merchant bankers to the issue. I am explained that the determination of the price band involves complex research, calculations and analysis o f various factors including market conditions, financing, project schedule, and project feasibility. This research and calculations are subjective in nature and no concrete data is available to us for study. 2. Some of the key documents and information provid ed by the company about the debt raising was technical and confidential in nature and hence, was not studied. 3. The software updates the prices at particular interval; hence the change in prices for less than a minute cannot be accommodated in it. This might become a shortcoming while deciding the arbitrage strategy as the stock prices changes at every fraction of seconds. 4. Non availability of the previous year‟s financial data (Profit &Loss account) was a major limitation in the process as the company hadn‟t started the production. Due to this, the exact percentage of the expenditure, incomes etc are not available. Thus, there are high chances that the projections made in the project might vary considerably from the actual results. 5. RPL‟s refinery has been des igned to have a Nelson Complexity Index of 14.0, which would make it amongst the most complex refineries in Asia. Similarly GRM of the company is estimated to be on higher side as compared to industry average. Due to this, the competitor‟s data cannot be of much help in estimating RPL‟s financials. Therefore, many assumptions have to be made while forecasting RPL‟s financial statements. 6. The comparison of Reliance Petroleum Limited with the competitors for the purpose of forecasting is not viable because RPL has been set up in a Special Economic Zone (SEZ), and therefore, the tax and other benefits are not available to other refineries. 7. The company cannot benchmark itself against the industry average and the industry leader.

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METHODOLOGY 1) Study of Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000, to understand the legal framework to be followed while doing an Initial Public Offering (IPO). 2) Study and analysis of prospectus of RPL to understand the equity funding for the company. It helped in understanding the various methods through which equity can be raised for a company. It also provided an insight about the promoter‟s contribution, lock in period etc. 3) Study of Common Terms Agreement relating to the financing of a refinery and polypropylene plant in Jamnagar (Gujarat) by RPL. This helped in understanding the agreement clause between the company and its lenders, thus explaining the debt financing of a company. 4) Financial forecasting of RIL is done by using the historic data of the company and by analyzing the financial performance in the past. Percentage of Sales method is used for estimating these statistics. For RPL, the latest quarter results, released on 23 rd April 2009 are used to do the financial forecasting. 5) Financial ratios, stock volatility, weighted average cost of capital (WACC), free cash flow to equity (FCFE) and free cash flow to firm (FCFF) are calculated as a part of valuation of the company. 6) SECONDARY DATA: Using the secondary data available on internet like analysis done about RPL and other competitor companies. 7) CASE ANALYSIS: Case analysis as we are studying the RPL‟s funding process to understand the funding procedure of any company.

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INDUSTRY OVERVIEW
GLOBAL OIL REFINING INDUSTRY:The oil refining industry is global in nature because crude oils, other feedstock and refined petroleum products can be transported at a relatively low cost by sea and by pipeline and there is worldwide demand for such products. The principal factors affec ting refining margins are the demand for and prices of refined petroleum products relative to the supply and cost of crude oils and other feedstock and the configuration, capacity and utilization rates of refineries. The range and quality of refined petroleum products produced by any given refinery depends on the types of crude oil used as feedstock and the configuration of the refinery. REFINED PETROLEUM PRODUCTS:LPG Naphtha Gasoline Middle distills Fuel oils Pet coke Bitumen Niche, high value added refined petroleum products

REFINING INDUSTRY CHARACTERISTICS:1. Economics of oil refining- Oil refining is primarily a margin-based business in which a refiner‟s goal is to optimize the refining processes and yields of all products in relation to feedstock used. The Gross Refining Margins (GRMs) of complex refineries are higher than those of simple refineries because complex refineries are able to generate a higher yield of light and middle distillates from lower cost heavier and sourer crude oils. Crude oil typically accounts for 90% to 95% of the total cost of refining. Because other operating expenses are relatively fixed, the goal of refineries is to maximize utilization
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rates, maximize the yields of higher value-added products, minimize feedstock costs and minimize operating expenses. 2. Location of oil refine ries- The location of an oil refinery can have an important impact on its refining margin since the location influences its ability to access feedstock and distribute its products efficiently. The location dictates what proportion of the feedstock and products can be transported by tanker vessels by sea or via pipelines, rail or tank trucks. Refining companies seek to maximize their profits by placing their products in the markets where they receive the highest returns after taking into account delivery transportation costs and other expenses such as import duties in those markets. Due to their flexibility and lower logistics costs, coastal refineries typically have a competitive advantage over the oil refineries located inland. 3. Crude oil supply- In 2004, the global oil supply was estimated by the International Energy Agency (“IEA”) to be 82.1 million barrels per day. The Middle Eastern OPEC countries accounted for 27.8% and total OPEC countries accounted for 39.5% of this supply. IEA estimates that by 2020, global oil supply may reach 104.9 million barrels per day with Middle Eastern OPEC countries accounting for 33.7% and total OPEC countries accounting for 45.2%. SUPPLY AND DEMAND FOR REFINED PRODUCTS:The world‟s total refining capacity has remained at approximately the same level as it w as in the beginning of the 1980s. This trend has been enabled, in part, by upgrades and debottlenecking of existing refineries and combinations of adjacent facilities. However, it is believed that tightening petroleum product specifications are likely to result in further closures of low complexity and low economic size refineries.

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Table 1: World Refining Capacity in MMBD 1994 World USA Europe including forme r Soviet Union Asia-Pacific India China Source: BP Statistical Review 2005 75.7 15.4 26.5 15.9 1.1 3.6 1999 81.9 16.5 24.8 21.4 2.2 5.4 2004 84.6 17.0 25.2 21.9 2.5 5.8 CAGR 19942004 1.1% 1.0% -0.5% 3.2% 8.9% 5.0%

Table 2: World demand growth in MMBD 1994 World USA Europe including forme r Soviet Union Asia-Pacific India China Source: BP Statistical Review 2005 68.2 17.7 19.8 17.1 1.4 3.1 1999 74.9 19.5 19.7 20.3 2.1 4.4 2004 80.8 20.5 20.0 23.5 2.6 6.7 CAGR 19942004 1.7% 1.5% 0.1% 3.2% 6.1% 7.8%

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KEY INDUSTRY TREND:Economic growth and energy demand- Economic growth is a key driver of energy demand given the close correlation between total energy demand and economic output. In the World Energy Outlook 2004, the IEA estimated that in recent decades energy demand has risen in a broadly linear fashion along with gross domestic product. Table 3: GDP Billion US$ (ON PPP BASIS)
2002 World Asia-Pacific Middle East USA China Brazil India Russia 47227 17100 1431 10075 5494 1370 3160 1657 2010 65449 26158 2113 13084 9716 1783 5031 2543 2015 78947 33076 2594 15216 13003 2170 6524 3019 2020 94582 41253 3147 17634 16919 2638 8430 3579 2025 112752 51024 3789 20292 21699 3209 10807 4192 CAGR(%) 2002-2025 3.9% 4.9% 4.3% 3.1% 6.2% 3.8% 5.5% 4.1%

Source: EIA International Energy Outlook 2005 Economic regulations- Although industrialized countries continue to consume most of the world‟s petroleum products, growth in demand for refined petroleum products over the last few years has primarily been driven by non-OECD countries, most notably China. The general growth in consumption and the stricter specifications have contributed to an increased demand for lighter refined petroleum products, such as gasoline and middle distillates, and lower demand for heavier products, such as fuel oils, contributing to the larger price differentials between higher value and lower value refined petroleum products. Therefore, it is believed that complex refineries which can produce environmentally friendly fuel are better positioned to meet growing market demand for these light products. Increase in light-heavy spread- Over the years, the demand for light and middle distillates has increased, including new demand for products that meet stricter environmental standards, driving up the sales prices for light and middle distillates. The combination of these market factors has resulted in an increasing light heavy differential. Given these trends, it is believed that complex refineries that are able to convert heavy crude oils into light products can achieve significantly higher GRMs than simple refineries.

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Shortage of complex refining capacity- As demand for fuel oil has been decreasing with the increase in demand for light products; existing simple refineries will either be phased out or will need to be upgraded. The chart below shows an incremental global refining requirement forecast to 2020, as reported by HART‟s World Refining and Fuels Services. While the additional crude distillation capacity is estimated at 18.8 million barrels per day (a 22% increase) from 2005 to 2020 levels, the conversion capacity additions are estimated at 12.4 million barrels per day (a 51% increase) from 2005 to 2020 levels and desulphurization capacity additions are estimated at 21.8 million barrels per day (a 54% increase) from 2005 to 2020 levels. Figure 1: Refining Require ment Forecast

Source: HART’S World Refining and Fuels Services, December 2005.

PROPELEYNE INDUSRTY:Polypropylene is a crystalline thermoplastic with a unique combination of physical, thermal and chemical resistant properties, produced by polymerization of propylene. According to CMAI, global consumption of polypropylene was estimated at 39.6 million tonnes and accounted for approximately 24% of all plastic demand in 2005. Polypropylene demand shows cycles that closely follow GDP cycles, growing as GDP increases. Global consumption of polypropylene is forecast to grow 5.4% per annum between 2005 and 2010 according to CMAI. Growth rates are expected to be higher in rapidly developing economies of the Asia region, including China and India, where current per capital consumption of polypropylene is low compared to more developed countries.
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BUSINESS OVERVIEW
In 2006 Reliance Petroleum Limited was a startup company, formed to setup a Greenfield petroleum refinery and polypropylene plant. The plant is located in a Special Economic Zone in Jamnagar (Gujarat). The developed refinery has a complexity of 14.0, as mea sured using the Nelson Complexity Index. RPL has two major promoters, Reliance Industries Limited (RIL) and Chevron India Holding Pvt. Ltd. The RPL refinery and polypropylene plant is located adjacent to the existing refinery of RIL. RPL is 75% owned subsidiary of RIL. RPL has an agreement with Bechtel France S.A.S (“Bechtel”) to license the technology for the major process units of the refinery and polypropylene plant. Bechtel has also provided engineering, project management and other construction se rvices to the project. The refinery and polypropylene plant is locates in a Special Economic Zone (the “SEZ”) and hence receives certain tax benefits and concessions under SEZ regulations. PLANNED FINANCING FOR THE PROJECT AT THE TIME OF IPO The capital cost of the project was estimated at Rs. 270 billion. The project was funded through debt (Rs. 157.5 billion) and equity (Rs 112.5 billion). Before IPO, RPL entered into a preliminary term sheet with certain banks and financial institutions to provide for a syndicate term loan facility for approximately Rs. 67.5 billion. Additional financing through export credit agencies was proposed for approximately Rs. 45-67.5 billion. Another Rs. 22.5-33.75 billion were to be raised by further debt financing. As the total funds requirement for the projects is estimated at Rs. 270,000 million. The company has proposed to fund the Project through a mixture of debt and equity. The details of the proposed funding are as follows:

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Table 4: Proposed Funding for RPL Source Total equity including proceeds from the issue Debt - Syndicate Loan - Exports Credits - Rupee Debt/Bonds Total Debt Total Source: RPL Prospectus 2006 pg.32 KEY COMPETITIVE STRENGTH Following are the major competitive strengths of RPL refinery and polypropylene plant: 1) RIL‟s superior project execution skills in constructing a complex refinery: One of the promoters of RPL, Reliance Industries Limited has core competency in conceptualizing and implementing the multi-billion dollar projects on time and in a cost efficient manner. Thus, RPL got benefits from the expertise of RIL in construction of its refinery. 2) Large and complex refinery capable of using heavier and sourer, low cost crude to produce high quality, premium petroleum products. 3) Benefits of low capital costs: RIL‟s has a prior experience in constructing and operating the Jamnagar refinery, especially in the areas of design and engineering, construction, labor and resource optimization, greater use of local material and resources and faster implementation. This resulted in a significant reduction in the capital cost for the project and enabled RPL to achieve lower cost per barrel, adjusted for complexity. 4) Strategic location with proximity to crude oil sources and target export market: The refinery is located on the west coast of India in close proximity to the Middle East, the largest crude oil producing region in the world. This will result in lower ship t urnaround time and crude freight costs. 5) Fiscal incentives by virtue of being located in a Special Economic Zone: An SEZ operates as a delineated area which is deemed to be a foreign territory for the purposes of trade operations, duties and tariffs. Being an export oriented refinery, RPL intend to Range Amount (in Rs. millions) 135000

45000-90000 45000-67500 22500-33750 157500 270000

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export the bulk of their production. Hence they will benefit from an income tax deduction on export turnover for a period of five consecutive years following the commencement of commercial operations (with a scaled reduction in income tax deduction for the next five year period and, subject to certain reinvestment conditions, for a third five year period thereafter). They will also be exempt from customs duty for goods and services imported into or exported from the SEZ and also from excise duty on domestic procurement, for the purposes of our authorized operations.

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LONG TERM SOURCES OF FINANCE
Long term sources of finance are those that are repayable over a longer period of time, generally for more than 12 months based on the feasibility of the Company‟s business/project. The sources of long term finance are equity shares, debentures, public deposits, term loans from banks etc. The need for the long term finance is determined by certain factors like the nature of the business, the goods produced and the type of technology that is required for the business to be carried out. Mainly, the long term sources of finance are used to finance fixed assets, to finance the permanent part of the working capital requirement and to fund the growth and expansion of the business as it is done for a longer period of time. The sources of long term finance can be broadly classified into: EQUITY- The amount of funds contributed by the owners or the stockholders including the retained earnings taken together is termed as the shareholder‟s equity. There are different methods of raising equity finance i.e. promoters co ntribution, initial public offering, private placement and right‟s issue. The company can issue its shares either on par i.e. at Face value or at a premium which is known as the share premium. The company‟s earnings which have not been distributed to share holders and have been retained in the business are known as the reserves and surplus. DEBT- An amount of money borrowed by one party from another is known as debt. A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest. Generally, the startup companies often turn to debt to finance their operations. In fact, almost all the corporate balance sheets will include some level of debt. The debt is also referred to as “leverage.” The most popular source for debt financing is the bank and other financial institutions. A company can also raise debt by selling the debentures of the company to the lenders.

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Refinery project requires huge investments for the setting up various processing units, pipelines, storages etc. This kind of project requires large amount of investment and short term means of finance like unsecured loans cannot meet such requirements. Hence, the long term sources of finance like raising funds through equity shares and raising long term secured debt is more viable. Moreover, the gestation period to start the operations of typical refining plant is also

very long. Accordingly huge amount of long term financing is envisaged in such projects.

CAPITAL MARKET
The Capital Market is the market for securities (broadly classified into debt and equity), where companies and government can raise long term funds. The securities decouple individual acts of savings and investment over time, space and entities thus allow savings to occur without concomitant investment. The capital market aids economic growth by mobilizing the savings of the economic sectors and directing the same towards channel of productive uses. The capital market acts as a break on channeling savings to low-yielding enterprises and impels enterprises to focus on performance. It continuously monitors performance through movements of share prices in the market and the threats of takeover. Financial market works as a conduit for demand and supply of long-term debt and equity capital. Money provided by savers and depository institutions are channeled towards the borrowers and investees through various financial instruments like securities. A capital market is a highly decentralized system comprising of three major parts, namely stock market, bond market, and money market. It also works as an exchange for trading existing shares.

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DIFFERENT KINDS OF EQUITY ISSUE

Figure 2: Diffe rent Kind of Equity Issue

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Initial Public Offering is the first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. In an IPO, the issuer may obtain the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market. A Further public offering (FPO) is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. An offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing obligations. Rights Issues is when a listed company proposes to issue fresh securities to its existing shareholders as on a record date. Here, existing shareholders have the privilege to buy a specified number of new shares from the firm at a specified price within a specified time. A rights issue is offered to all existing shareholders individually and may be rejected, accepted in full or (in a typical rights issue) accepted in part by each shareholder. Rights are often transferable, allowing the holder to sell them on the open market. A private placement is an issue of shares or of convertible securities by a company to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. It is a direct private offering of securities to a limited number of sophisticated investors. This is a faster way for a company to raise equity capital. A private placement of shares or of convertible securities by a listed company is generally known by name of preferential allotment. A listed company going for preferential allotment has to comply with the requirements contained in Chapter XIII of SEBI (DIP) Guidelines which include pricing, disclosures in notice etc, in addition to the requirements specified in the Companies Act. A Qualified Institutions Place ment is a private placement of equity shares or securities convertible in to equity shares by a listed company to Qualified Institutions Buyers only in terms of provisions of Chapter XIIIA of SEBI (DIP) guidelines. The Chapter contains provisions relating to pricing, disclosures, currency of instruments etc.

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INITIAL PUBLIC OFFER (IPO)
An Initial Public Offer (IPO) may be termed as the maiden offer made by a non-public company to take up equity stake by the public. This offering is normally made by the company in order to raise public funds for its future projects. A corporate may raise capital in the primary market by way of an initial public offer, rights issue or a private placement by issuing either debt or equity instruments. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is the largest source of funds with long or indefinite maturity for the company. IPO is the first sales of stock by a company to the public through investment banking firms. A successful initial public offering increases the visibility and appeal of the company, thereby increasing the demand and value for shares of the company. Public companies have many shareholders and are subject to strict rules and regulations. They comprise of a BOD (Board of Directors) consisting of the requisite number of independent directors. This is for complying with the provisions of Corporate Governance. The management of the company is entrusted to update the BOD with all developments including the updated financial information on every quarter. In India, the regulatory body that guides these public companies is Securities and Exchange Board of India (SEBI). Reasons for Going Public: The main reasons for going public generally include: Raising funds to finance capital expenditure programs like expansion, diversification, modernization etc Arranging funds for increased working capital requirements Financing acquisitions like a manufacturing unit, brand acquisitions etc Debt refinancing It works as exit route for existing investors.

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Pros and Cons of IPO: When a company has strong foothold in the market, it is easier for the company to raise funds at a cheaper cost. But when a private firm starts off at an initial stage its cost of acquir ing funds is generally high. To support its activities company requires long term funds at a cost which is lower than the return on capital employed. The benefits of an IPO are: A publicly traded company may tap a broader universe of investors as well as a larger pool of investment capital. It provides liquidity to the existing shareholders. A publicly traded company seeks more attention and hence increases its visibility. It may raise more capital through additional stock offerings if sufficient investor interest exists. A publicly traded company may be able to attract and retain highly qualified personnel if it can offer employee stock option plans, bonus shares or other incentives, which might be instrumental in reducing the high attrition rate from which the corporate world is presently suffering. A listed company is in the position of winning the confidence of the mass because of its transparency exercised through stringent regulations imposed by the stock exchanges.

However, the use of IPOs is limited because of the following reasons: It involves substantial expenses. A publicly traded company needs to make continuous disclosers. It involves complexity in complying with federal and state laws governing the sale of business securities. Thus, it has increased regulatory monitoring. Offering business's ownership for public sale does little good unless the company has sufficient investor awareness and appeal to make the IPO worthwhile Management must be ready to handle the administrative and legal demands of widespread public ownership. Therefore, it requires substantial amount of management time and efforts.
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An IPO also means a dilution of the existing shareholders interests. IPOs can be a risky investment for the individual investor as it is difficult to predict what the stock will do on its initial day of trading.

INTERMEDIARIES INVOLVED IN IPO
Merchant Banker: Merchant Banker has been defined under the Securities & Exchange Board of India (Merchant Bankers) Rules, 1992 as "any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management". Merchant Bankers assists the company from the initial phase of preparing prospectus to the listing of securities at the stock exchange. It is mandatory for them to carry due diligence for all the information provided in the prospectus and they must issue a certificate to SEBI. A Company may appoint more than one Merchant Banker provided inter-Se allocation of responsibilities between the Merchant Bankers is properly structured. Unde rwriters: Underwriters are a company or other entity that administers the public issuance and distribution of securities from a corporation or other issuing body. An underwriter works closely with the issuing body to determine the offering price of the securities, In case there is under subscription (i.e., the company does not receive good response from public and amount received from is less than the issue size), underwriters subscribe to the unsubscribed amount so that the issue is successful. Bankers to an Issue: Bankers to an issue means a scheduled bank carrying on all or any of the following issue related activities namely:i. ii. iii. iv. Acceptance of application and application monies; Acceptance of allotment or call monies; Refund of application monies; Payment of dividend or interest warrants.

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Registrar and Share Transfer Agents: They are responsible for processing all applications received from the public and prepare the basis of allotment. The dispatches of share certificates / refund orders are also handled by them. Stock Brokers & Sub-Broke rs: These are intermediaries who charge a fee or commission for executing buy and sell orders submitted by an investor. Depositories are the intermediaries who hold securities in dematerialized form on behalf of the shareholders. For RPL, the book running lead managers were: 1. JM Morgan Stanley Private Limited 2. DSP Merrill Lynch Limited 3. Citigroup Global Markets India Private Limited 4. Deutsche Equities India Private Limited 5. Enam Financial Consultants Private Limited 6. HSBC Securities and Capital Markets (India) Private Limited 7. ICICI Securities Limited 8. SBI Capital Markets Limited 9. UBS Securities India Private Limited The Registrar to the issue for RPL is KARVY Computershare Private Limited.

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CONSIDERATION BEFORE DECIDING FOR AN IPO
Before deciding to launch an IPO, the management of the issuing company should pay considerable attention to its future business model. Deciding to come out with the IPO considering the brighter side of mobilizing resources is not enough, unless it is supported by an increase in the shareholder‟s value of the invested funds. When an inve stor invests in the stock of a company, he expects its stock value to grow constantly, subject to market conditions. Therefore, to have a successful IPO, the company must have a robust business model and a considerable future growth prospects. For a successful IPO, a company should take care of following point: It should have an effective risk management system. It should also have an internal audit department reviewing the procedures implemented and continuously improve the same. The company should abide by the corporate governance procedures to safeguard the interests of its stakeholders as well as its own interest. The management should be capable enough to make effective and efficient utilization of the resources. In case, the company is unable to fulfill the above the valuation of stock deteriorates and the company will lose market confidence. Decreased valuation of the company may affect the lines of credits, pricing of any follow-on public issue, ability to maintain morale of the employees, confidence and value of the shareholders‟ wealth. Thus a company should comply with the above mentioned points in order to have a successful IPO.

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IPO BY AN UNLISTED COMPANY
Securities and Exchange Board of India (SEBI) came into existence in 1992, since Controller of Capital Issues was dissolved. To come up with an IPO the company needs to fulfill all guidelines (rules and regulation) issued by SEBI under Section 11 of the Securities and Exchange Board of India Act, 1992. The guidelines are called Disclosure and Investor Protection Guidelines (DIP). As per the SEBI guidelines, an unlisted company can make a public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date, only if it meets all the following conditions: a. The company has net tangible assets of at least Rs.3 crores in each of the preceding 3 full years of which not more than 50% is held in monetary assets. b. The company has a track record of distributable profits for at least 3 years out of immediately preceding 5 years. c. The company has a net worth of at least Rs. 1 crore in each of the preceding 3 full years. d. In case the company has changed its name within the last 1 year, at least 50% of the revenue for the preceding 1 full year is earned by the company from the activity suggested by the new name; and e. The aggregate of the proposed issue and all the previous issues made in the same financial year in terms of size does not exceed 5 times its pre- issue net worth as per the audited balance sheet of the last financial year. As RPL was a newly incorporated company hence the above conditions were not applicable. SEBI guidelines take care of the condition where a newly incorporated company might like to go for an IPO hence as per SEBI guideline, if the unlisted company does not comply with the above given conditions it may make an IPO of equity shares or any other security if it meets both the conditions: a. The issue is made through book building process with at least 50% of the net offer being allotted to qualified institutional buyers (QIB), failing which the full subscription monies
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shall be refunded, OR, the project has at least 15% participation by Financial Institutions/ Scheduled Commercial Banks, of which at least 10% comes from the appraisers. In addition to this at least 10% of the issue size shall be allotted to QIBs failing which the full subscription monies shall be refunded. b. The minimum post issue face value capital of the company shall be Rs. 10 crores, OR, there shall be compulsory market making for at least 2 years from the date of the listing of the shares. RPL very well qualify in the above stated condition. The details of the same are elaborated while discussing the details of RPL’s IPO. Note: Net tangible assets mean the sum of all net assets of the company, excluding the intangible assets defined under the AS-26 issued by ICAI. Project means the object for which the monies proposed to be raised to cover the objects of the issue.

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PRE ISSUE OBLIGATIONS
As per the SEBI Guidelines, there are certain pre- issue obligations that the Company should take into account before the issue. These obligations can be summarized as follows: 1. The Lead Merchant banker has exercised due diligence about all the aspects of offering, veracity and adequacy of disclosure in the offer documents as the liability of the merchant banker continues even after the completion of the issue process. 2. The documents that had to be submitted along with the Offer Document by the Lead Manager like the Memorandum of Understanding, a statement of the allocation of the responsibilities among all the merchant bankers to the issue and the list of promoters‟ group and other details. 3. The condition given by SEBI regarding the minimum number of lead manager to be appointed based on the size of the issue (given in the table below) had been complied with. Table 5: Lead Managers to size of issue Size of the Issue Less than Rs. 50 crores Rs.50 crores to Rs.100 crores Rs.100 crores to Rs.200 crores Rs.200 crores to Rs.400 crores Above Rs.400 crores No. of Lead Managers 2 3 4 5 5 or more

4. An agreement with the depositories should have been entered into by the issuer company
for the dematerialization of securities.

From the study of the prospectus of RPL, I understand that all the above obligations were fulfilled by the Company.

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TERMS OF THE ISSUE

The Equity Shares being offered are subject to the provisions of the: o Companies Act o Memorandum of Association of the company o Articles of Association of the company o The terms of the Red Herring Prospectus, the Prospectus, the Bid cum Application Form and other documents/certificates. The Equity Shares are also subjected to: o Laws as applicable o Guidelines o Notifications o Regulations relating to the issue of capital and, o Listing and trading of securities issued by SEBI, Government of India, and the Stock Exchanges.

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PRICING BY COMPANIES ISSUING SECURITIES
An unlisted company eligible to make a public issue and desirous of getting its securities listed on a recognized stock exchange pursuant to a public issue, may freely price its equity shares. Price Band: As per the SEBI guidelines, following are the points to be taken care off while deciding the price band of the issue: a. Issuer company can mention a price band of 20% (cap in the price band should not be more than 20% of the floor price) in the offer document filed with the Board and the actual price can be determined at a later date befo re filing of the offer document with the ROCs. b. The final offer document shall contain only one price and one set of financial projections, if applicable. Freedom to determine the denomination of shares for public/right issues and to change the standard denomination: a. In case of IPO by an unlisted company a. If the Issue Price is Rs 500 or more, the issuer company shall have discretion to fix the face value below Rs 10 per share, subject to the condition that the face value shall in no case be less than Re 1 per share. b. If Issue Price is less than Rs 500 per share, the face value shall be Rs 10 per share.

As the Issue Price of RPL is Rs 60, the face value of the RPL shares is Rs 10 per share.

b. The disclosure about the face value of the shares (including the statement about the issue price being “X” times of the face value) shall be made in the advertisement, offer document and in application forms.

RPL has complied with the above guideline as it has clearly mentioned the face value of the shares in all the above stated documents.
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Book Building Process
Corporate can raise capital in the primary market either by way of an initial public offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. Initial Public Offering can be made either through the fixed price method or the book building method or a combination of both. In case the issuer company wants to issue the securities through the book building process then as per SEBI guidelines, the securities can be issued in the following manner: a. 100% of the net offer to public through the book building procedure. b. 75% of the net offer to public through the book building process and the remaining 25% through the fixed price method. c. Under the 90% scheme, this percentage would be 90 and 10 for the book building process and fixed price method respectively.

THE PROCESS The issuer who is planning an IPO nominates a lead merchant banker as a „book runner‟. The issuer specifies the number of securities to be issued and the price band for orders. The issuer also appoints syndicate members with whom orders can be placed by the investors. Investors place their order with the syndicate member who incorporates the orders into the „electronic book‟. This process is called „bidding‟ and is similar to open auction. The Book should remain open for a minimum of five days. Bids cannot be entered for a price which is less than the floor price. The bidder can revise bids before the issue closes. On the close of the book building period the book runner evaluate the bids on the basis of the evaluation criteria which may include:

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-

Price Aggression Investor quality Earliness of bids

The book runner and the company conclude the final price at which it is willing to issue the stock and allocation of securities. Generally, the number of shares is fixed; the issue size gets frozen based on the price per share discovered through the book building process. Allocation of securities is made to the successful bidders.

Price Band

Draft Red Herring Prospectus

SEBI + Stock Exchange

Stock Exchange Initial Listing Approval

Issue Opens

SEBI Filing

Red Herring Prospectus

SEBI Comment

ROC filing (3 days before the issue opens)

Issue Closes

Fixation of Price

Prospectus

ROC Filing

Figure 3: Book Building Process

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PROMOTER’S CONTRIBUTION & LOCK -IN PERIOD
In accordance with the SEBI Guidelines, 2000; the promoter‟s contribution in any issue shall be in accordance with the following provisions as on: a. The date of filing the red herring prospectus (in case of a book built issue) or prospectus (in case of a fixed price issue) with ROC or letter of offer with designated stock exchange as the case may be in case of fast track issue and b. The date of filing draft offer document with the board, in any other case. In case of the public issue by unlisted companies, the promoter shall contribute not less than 20% of the post issue capital. The promoters have to bring in the full amount of the promoters contributio n including premium at least one day prior to the issue opening date, which shall be kept in escrow account with a Scheduled commercial Bank and the said contribution /amount shall be released to the company along with the public issue proceeds. In case t he promoter‟s contribution has already been deployed by the company, the company has to give the cash flow statement in the offer document disclosing the use of such funds received as promoter‟s contribution. Details of pre- issue shareholding and promoter‟s contribution in RPL are as under; Table 6: Pre Issue Shareholdings Name of Shareholders Pre-Issue (As on date of filing of the Red Herring Prospectus with ROC) Number of Equity Shares Equity shares capital (%) Post-Issue Number of Equity Shares Equity share capital (%) 75% 5% 10% 10% 100%

Promoter – RIL 2,700,000,000 Promoter – Nil Chevron Pre-IPO Investors 450,000,000 Public Nil Total 3,150,000,000 Source: RPL Prospectus 2006 pg. 24

85.71% 0.00% 14.29% Nil 100%

3,375,000,000 225,000,000 450,000,000 450,000,000 4,500,000,000

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Table 7: Capital Structure Price/ Equity Shares (Rs) Dec 06,05 100,000 10 Jan 30,06 4,300,000 10 Feb 25,06 2,695,600,000 10 Apr 03,06 450,000,000 60 Apr12, 06 900,000,000 60 Source: RPL Prospectus 2006 pg.23 Date of Allotment No. of Equity Shares Consideration (Cash, bonus, other than cash) Cash Cash Cash Cash Cash Cumulative Share Premium (Rs) Nil Nil Nil 22,500,000,000 67,500,000,000 Cumulative Share Capital (Rs) 100,000 4,400,000 2,700,000,000 3,150,000,000 4,050,000,000

The entire pre-Issue capital (including the Pre-IPO placement, but excluding the minimum Promoter‟s Contribution) would be locked - in for a period of one year from the date of allotment in the Issue. Hence the capital brought-in on 6-Dec-2005, 30-Jan-2006 and 25-Apr-2006 by Reliance Industries Limited would be locked for 1 year. 900,000,000 Equity Shares which form the 20% of the post Issue paid- up capital. These Equity Shares represent the minimum Promoters Contribution pursuant to clause 4.1.1 of the SEBI Guidelines. In terms of clause 4.11.1 of SEBI Guidelines, these Equity Shares will be locked-in for a period of 3 years from the date of allotment in the Issue or the date of commercial production, whichever is later or as per the SEBI Guidelines. As per Clause 4.15.1 of the SEBI Guidelines, the locked- in Equity Shares held by the Promoter can be pledged only with banks or financial institutions as collateral security for loans granted by such banks or financial institutions, provided the pledge of shares is one of the terms of sanction of loan. Under Clause 4.16.1(a) of the SEBI Guidelines, the Equity Shares held by persons other than the Promoter prior to the Issue may be transferred to any other person holding the Equity Shares which are locked- in as per Clause 4.14 of the SEBI Guidelines, subject to continuation of the lock-in in the hands of the transferees for the remaining period and compliance with SEBI Takeovers Regulations.

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Further, under Clause 4.16.1(b) of the SEBI Guidelines, the Equity Shares held by the Promoter may be transferred to and amongst the Promoter group or to a new Promoter or persons in control of the Company subject to continuation of the lock- in in the hands of the transferees for the remaining period and compliance with SEBI Takeover Regulations. Thus, RIL has

transferred 225,000,000 Equity Shares constituting 5% of the post-Issue Equity Share Capital to Chevron India Holdings Pvt. Ltd. on April 27, 2006. These Equity Shares are held by Chevron India as part of the minimum promoter‟s contribution.

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THE ISSUE
Table 8: Issue Details Issue of Equity Shares Of which, Promoter‟s Contribution Net Issue to Public Of which the QIB Portion Of which Available for Allocation to Mutual Funds Balance for all QIB including Mutual Funds Non-Institutional Portion Retail Portion Equity Shares outstanding prior to the Issue Equity Shares outstanding after the Issue Source: RPL Prospectus 2006 pg.5 1350,000,000 Equity Shares 900,000,000 Equity Shares 450,000,000 Equity Shares At least 270,000,000 Equity Shares (allocation on proportionate basis) 13,500,000 Equity Shares (allocation on proportionate basis) 256,500,000 Equity Shares (allocation on proportionate basis) Minimum of 45,000,000 Equity Shares (allocation on proportionate basis) Minimum of 135,000,000 Equity Shares (allocation on proportionate basis) 3,150,000,000 Equity Shares 4,500,000,000 Equity Shares

The total Issue of equity shares by RPL is of 1,350 million equity shares, out of which the promoter‟s contribution is nearly 2/3rd of the issue, i.e. 900 million equity shares and 1/3 rd of the total issue (450 million equity shares) are the net issue to public. As equity shares are being offered to the public through 100% Book Building Process in Out of 450 million shares (net issue to the public), in accordance with the SEBI Guidelines read with Rule 19(2)(b) of the SCRR (The Securities Contracts (Regulation) Rules, 1957, as amended from time to time), wherein: 1) At least 60% of the Net Issue shall be allocated on a proportionate basis to QIBs (270 million shares out of 450 million shares offered to the public), including up to 5% of the QIB Portion that shall be available for allocation on a proportionate basis to Mutual Funds only (13.5 million shares out of 270 million shares offered to QIBs) and the remainder of the QIB Portion shall be available for Allocation on a proportionate basis to

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all QIB Bidders, including Mutual Funds (256.5 million shares out of 270 million shares offered to QIBs); 2) Minimum of 10% of the Net issue shall be available for allocation on a proportionate basis to the Non-Institutional Bidders (45 million shares out of 450 million shares offered to QIBs) and 3) Minimum of 30% of the Net Issue shall be available for allocation on a proportionate basis to Retail Individual Bidders (135 million shares out of 450 million shares offered to QIBs), subject to valid Bids being received at or above the Issue Price.

The outstanding equity shares prior to the IPO were 3150 million shares, out of which 2700 million shares belonged to the Reliance Industries Limited (RIL) and 450 million shares were allotted to pre-IPO investors. FACE VALUE AND ISSUE PRICE The face value of the Equity Shares is Rs. 10 each and the Floor Price is Rs. 57 and the Cap Price is Rs. 62 per Equity Share. Issue Price is Rs 60 per equity share, which is 6 Times the face value. The above stated information has been clearly mentioned on the cover page of the RPL prospectus. Hence, it is in compliance with the SEBI guidelines, where the issuing company is asked to make a clear statement about the face value and the issue price of the shares. MARKET LOT AND TRADING LOT The equity shares of the company were only allotted in dematerialized form complying with existing SEBI Guidelines which states that the trading in the Equity Shares of the Company should only be in dematerialized form for all the investors.

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OBJECTS OF THE ISSUE
The objects of the Issue by the company were to achieve the benefits of listing and raising capital for financing the proposed project. The company intended to utilize the proceeds of the Issue, after deducting underwriting and management fees, selling commissions and other expenses associated with the Issue (“Net Proceeds”), to partially finance the equity portion of the Project. As the SEBI guidelines, ask for clear information about the projected funds requirement of the company in the prospectus, RPL has included the project estimates in the following manner: Fund requirements: The company had proposed to set up the Project for an estimated cost of Rs. 270,000 millions (approx US$ 6 billion) as estimated by the company and intend to finance the Project through a combination of debt and equity. The Project was expected to begin commercial operations in, or around, December 2008. The estimated expenses expected to be incurred in connection with the Project are set forth below on a half yearly basis: Table 9: Estimated Expenses 1st half of CY 2006 2ndhalf of CY 2006 1st half of CY 2007 2ndhalf of CY 2007 1st half of CY 2008 2ndhalf of CY 2008 & beyond Total

Deposits for 5990 infrastructure including utilities etc. Equipment/Constr 25474 22176 uction costs etc. Technical fees 21678 7712 Interest during 7916 2715 construction, pre operating costs Contingency Margin money for working capital Total 61058 32639 Source: RPL Prospectus 2006 pg. 31

5990

40037 515 3874 44426

52770 2 5586 4875 63233

22295 650 7197 9750 39892

1088 9361 3892 4871 9540 28752

163840 39918 31216 19496 9540 270000

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ISSUE RELATED EXPENSES The SEBI guidelines along with the projected cost of the Project also ask for the details of the other expenses that the company has to make in order to make an issue. Hence complying with that RPL prospectus includes the following information: The expenses of the Issue include, among others, underwriting and management fees, selling commission, printing and distribution expenses, legal fees, statutory advertisement expenses and listing fees. The estimated expenses of the Issue are as follows: Rs. in millions Table 10: Estimated Expenses of Issue Lead management, underwriting and selling commission Advertising and marketing expenses Printing, stationary including transportation of the same Others (Registrar‟s fees, legal fees, listing fees, etc.) Total estimated Issue expenses
Source: RPL Prospectus 2006 pg.34

202.5 80.0 92.0 93.1 467.6

This gives the investor a clear picture about the plan of the company, as to how they are planning to invest the funds which are raised by them. Thus, by following the SEBI guidelines, the issuing company becomes transparent and gives investors a chance to make an informed decision.

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BASIS FOR ISSUE PRICE
The Issue Price has been determined by the company in consultation with the Book Running Lead Managers (BRLMs) on the basis of assessment of market demand for the offered Equity Shares by the Book Building Process. The face value of the Equity Shares is Rs. 10 and the Issue Price is 6.0 times the face value. The factors which influence the deciding of the issue price by the company can be broadly classified as qualitative and quantitative factors. These factors are discussed as under: QUALITATIVE FACTORS Factors Internal to the Company The company is promoted by Reliance Industries Limited (RIL), which is amongst the largest private sector companies, in terms of market capitalization, in India. Reliance Petroleum will benefit from economies of scale arising out of the size. The proposed refinery, having a capacity of 580 KBPSD, will be the sixth largest refinery globally based on current capacities. (Source: Oil and Gas Journal, December 2005). The company would derive significant advantages owing to higher complexity of the refinery. The higher complexity levels will enable the company to process lower cost, heavier and sourer crude oils and yet achieve superior yields of higher value products such as gasoline, aviation fuel and diesel. Nelson Complexity Index is a measure of secondary conversion capacity in comparison to the primary distillation capacity of any refinery. It is an indicator of not only the investment intensity or cost index of the refinery but also the value addition potential of a refinery. RPL has the NCI of 14.0 which is highest in India. Close proximity to the Middle Eastern crude oil sources would help the company in reducing turn-around time and crude freight costs. RPL will enjoy several fiscal incentives by virtue of being set-up in a Special Economic Zone.
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RIL‟s expertise will be available for crude and other feedstock procurement, marketing of products, operation and maintenance of the refinery as well as risk management. Factors External to the Company As shown in the Industry analysis, the world economy is expected to grow at a CAGR of 3.9% per annum in terms of GDP on a purchasing power parity basis between 2002 and 2025. RPL is likely to benefit from this expected growth in world economy as there is a close co-relation between demand for petroleum products and economic activity. The company is also likely to benefit from the significant imbalances between demand and supply of different refined petroleum products that have developed in certain regions like the shortage of gasoline production capacity in the United States and the shortage of diesel fuel production capacity in Western Europe. QUANTITATIVE FACTORS Table 11: Comparison with Domestic Peers EPS (Rs.) P/E RONW (%) BOOK VALUE (Rs.) PRICE PER SHARE 562.48 46.33 734.28 177.10 67.62 232.96 RATIO OF PRICE PER SHARE TO BOOK VALUE 2.53 3.77 2.72 0.96 1.78 1.73

RPL IOCL HPCL BPCL MRPL RIL KRL BRPL CPCL

15.80 4.10 63.30 32.20 9.80 44.80

35.60 11.30 11.60 5.50 6.90 5.20

20.00 15.80 15.80 48.50 21.80 38.60 73.00 33.00

9.99 222.50 248.80 212.90 12.30 270.40 184.80 38.00 134.40

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From the above table it can be seen that the ratio of the price per share to the book value per share for all the 8 companies ranges between 0.96 to 3.77 or we can say 1 to 4 (approx). Therefore, based on the findings above, the qualitative factors for the company and forecasted revenue based on internal calculations, the issue price was determined at Rs. 60 i.e., the issue price is 6 times the face value. The price band for the book building process was Rs. 57 to Rs. 62.

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SEZ AND TAX BENEFITS
SEZs are those geographical regions of a country where the economic laws are more liberal as compared to the laws generally followed in the country. As per the requirements of the guidelines given by SEBI, the auditors of the issuing company should certify through the report about the tax benefits that would be available to the company and its shareholders are covered under the direct tax laws, Special Economic Zones Act, 2005 and Gujarat Special Economic Zones Act, 2004. The benefits available to RPL can be summarized as under: 1. The Company is entitled to deduction of 100% of the profits and gains from its unit set up in Special Economic Zone (SEZ) for a period of 5 consecutive assessment years and 50% of such profits and gains for further 5 consecutive assessment years. 2. The shares of the Company are not liable to Wealth Tax. 3. The Company is exempted from payment of Stamp Duty and registration fees payable on transfer of land within SEZ. 4. The Company is exempted from levy of stamp duty and registration fees o n loan agreements, credit deeds and mortgages executed by the SEZ or unit set up in the processing area of SEZ. 5. The Company is exempted from Sales Tax, Purchase Tax, Motor Spirit Tax, Luxury Tax, Entertainment Tax and other taxes and cess payable on sales and transactions within the SEZ. 6. The inputs (goods and services) purchased by the Company from Domestic Tariff Area shall also be exempted from sales tax and other taxes under the state laws of Gujarat.

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STOCK MOVEMENT IN 2006
In an attempt to find out any movement in the stock prices of the competitors and the promoter of RPL due to the IPO of the company, a study of the competitor‟s stock prices has been done. Following are the stock movements of various related companies for year 2006 (the year in which the IPO of RPL has been made): Mangalore Refinery & Petrochemicals Limited (MRPL) The movement of stocks of MRPL over a period of one year starting from January 2, 2006 to December 2, 2006 has been constant except for a sudden increase followed by a steep fall around the month of May-June. Apart from this secondary fluctuation, the primary trend has been almost constant.

MRPL STOCK MOVEMENT
70 60 50 40 30 20 10 0

Figure 4: MRPL Stock Movement

Bharat Petroleum Corporation Limited (BPCL) The movement of stocks of BPCL over a period of one year starting from January 2, 2006 to December 2, 2006 has been constant except for a slight increase followed by a fall around the month of May-June. Apart from this secondary fluctuation, the primary trend has been almost constant.

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BPCL STOCK MOVEMENT
600 500 400 300 200 100 0

Figure 5: BPCL Stock Movement

Hindustan Petroleum Corporation Limited (HPCL) The movement of stocks of HPCL over a period of one year starting from January 2, 2006 to December 2, 2006 has been constant except for a slight fall in the month of June followed by the recovery period till the month of September. Apart from this secondary fluctuation, the primary trend has been almost constant.

HPCL STOCK MOVEMENT
400 300

200
100 0

Figure 6: HPCL Stock Movement

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Reliance Industries Limited (RIL) The movement of stocks of RIL over a period of one year starting from January 2, 2006 to December 2, 2006 has been constant except for a sudden increase followed by a fall around the month of May-June. Apart from this secondary fluctuation, the primary trend has been almost constant. The movement in the stock prices of RIL has been almost similar with the overall movement in the market.

RIL STOCK MOVEMENT
1400.00 1200.00 1000.00 800.00 600.00 400.00 200.00 0.00

Figure 7: RIL Stock Movement

Reliance Petroleum Limited (RPL) The movement of stocks of RPL over a period of one year starting from January 2, 2006 to December 2, 2006 has been constant.

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RPL STOCK MOVEMENT
120 100 80 60 40 20 0

Figure 8: RPL Stock Movement

OVERALL MARKET TREND The primary trend of the market in the year 2006 was bullish in nature along with minor fluctuations in the opposite direction. During the months of May & June, there was a secondary trend which projected a bearish movement in the market. The stock market is generally influenced by many political and economical factors. During the period of secondary trend, the main incidents that took place were: The Left party took over in the state elections in Kerala & West Bengal. Pull out by foreign investors from the emerging markets like India, Taiwan and South Korea. Blowing up of the issue of higher education reservation. Hike in the fuel prices. Hiking the rates by 25 bps by RBI. During May-June, 2006, Sensitivity Index of BSE lost 28.14%. Experts said that the volatility during these two months was mainly due to the nervousness among the investors. Moreover, the apprehension related to the hike in the US Fed rates was pulling the fore ign investors away from the emerging markets like India.

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This is the major cause of the secondary trend in the movement of the stock market during the two months and a related movement could be seen in the prices of the shares of the companies like HPCL, MRPL, BPCL and RIL. Conclusion: For the study of various related companies and the overall market trend, it is been concluded that the stock movements of the companies mainly depend on the overall market movement. In turn, the overall market movement depends on various economic and political factors. The IPO by Reliance Petroleum Limited does not show a major impact on the stock prices of the related companies because of the above stated factor. There is one more factor which explains the unrelated behavior of the stock prices of competitors and the IPO, that is: Oil and gas market in India is a supplier driven market and hence the entrance of a new competitor in the market does not pose a threat for other players in the market.

STOCK DATA AS ON APRIL 2, 2009
Market Capitalization is a measurement of corporate size of a public company. Thus capitalization can represent the public opinion of company‟s net worth. The stock price of Reliance Petroleum Limited along with the total number of outstanding shares helps in calculating the market capitalization of the company.

Figure 9: RPL Details

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Current market price (April 2, 2009): Rs. 103.60 Reliance Petroleum Limited Key Data: Currency Fiscal Yr Ends Share Type Indian Rupees March Ordinary Market Capitalization Shares Outstanding Closely Held Shares 466,198,640,250 4,499,986,875 3,391,958,030

Where,

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EXTERNAL COMMERCIAL BORROWINGS (ECB)
External Commercial Borrowings are being permitted by the Government for providing an additional source of funds to Indian corporate and PSUs (Public Sector Undertak ings) for financing expansion of existing capacity and as well as for fresh investment, to augment the resources available domestically. External Commercial Borrowings are approved within an overall annual ceiling, consistent with prudent debt management, keeping in view the balance of payments position and level of foreign exchange reserves. External Commercial Borrowings (ECBs) are defined to include commercial bank loans,

buyers‟ credit, suppliers‟ credit, securitized instruments such as Floating Rate Notes and Fixed Rate Bonds etc., credit from official export credit agencies and commercial borrowings from the private sector window of Multilateral Financial Institutions such as International Finance Corporation (Washington), ADB, AFIC, CDC, etc ECBs can be raised only through the internationally recognized source such as banks, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity-holders, international capital markets etc. Any offers from non-recognized sources are not entertained. ECB can be accessed under two routes. They are – Automatic Route and Approval Route. Automatic Route External Commercial Borrowing for investment in real sector, especially infrastructure sector comes under automatic route. They don‟t require any RBI or government approvals. The maximum amount of ECB which can be raised under this route by an eligible borrower can be USC 500 million during a single financial year. However, NGOs engaged in micro- finance activity are allowed USD 5 million in a financial year. Approval Route Borrowings raised through this route require an approval from an Empowered committee set up by RBI. Any case which falls outside the purview of automatic route comes under approval route.

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ELIGIBLE BORROWERS
AUTOMATIC ROUTE 1) Corporate registered under the Companies Act, 1956 (except financial intermediaries, such as banks, financial institutions (FIs) & housing finance companies), are eligible.

2) NGOs involved in micro-financing are also eligible, if they have a satisfactory borrowing relationship for at least 3 years with a scheduled commercial bank authorized to deal in foreign exchange.

3) Any individual, trust or non-profit making organization (except the NGO involved in micro- financing) is not eligible for raising ECB.

APPROVAL ROUTE 1) Financial institutions dealing exclusively with infrastructure or export finance are considered on a case by case basis.

2) Banks and financial institutions which had participated in the textile or steel sector restructuring package as approved by the Government are also permitted. However, they are only considered only to the extent of their investment in the package. Any ECB which has already been availed by the above stated entities are deducted from their entitlement.

3) NBFCs (Non Banking Financial Companies) are permitted to raise ECB under this route towards import of infrastructure equipment for leasing to infrastructure projects with a minimum average maturity of 5 years.

4) Foreign Currency Convertible Bonds (FCCBs) by Housing Finance Companies with strong financials satisfying criteria notified by RBI are permitted under the Approval Route. 5) Any other cases falling outside the purview of the automatic route limits.
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RECOGNIZED LENDERS
Following are the recognized sources from where borrowers can take loans: 1) International banks, international capital markets, multilateral financial institutions (such as IFC, ADB, CDC etc.,), 2) Export credit agencies and 3) Suppliers of equipment, foreign collaborators and foreign equity holders. 4) NGOs engaged in micro- financing can also take loans from overseas organizations and individuals. But individual lenders from countries wherein banks are not required to adhere to Know Your Customer (KYC) guidelines are not permitted to extend ECB. „Foreign Equity Holder‟ is a foreign lender for ECB. They require minimum equity participation, in the capacity of equity holder, in the borrower‟s company. It is as follows:

1) If the ECB is up to USD 5 million, the overseas lender should directly hold minimum of 25% of the equity. 2) If the ECB is more than USD 5 million, the overseas lender should directly hold minimum of 25% of the equity and the debt-equity ratio should not exceed 4:1 (i.e. the proposed should not exceed 4 times the direct foreign equity holding). 3) If the debt-equity ratio exceeds 4:1 ratio, such case will be considered by RBI under Approval route.

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AVERAGE MATURITIES FOR ECB
ECBs have the following minimum average maturities: 1) Minimum average maturity of five years for external commercial borrowings greater than USD 20 million equivalent in respect of all sectors except 100% Export Oriented Units (EOUs);

2) For external commercial borrowings of less than or equal to USD 20 million equivalent (for all sectors except 100% EOUs) has a minimum average maturity of three years.

3) 100% Export Oriented Units (EOUs) are permitted ECB at a minimum average maturity of three years for any amount.

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RPL DEBT
Reliance Petroleum Limited, promoted by Reliance Industries Limited and Chevron India Holding Pvt. Ltd., rose at total of Rs157.5 billion. For this it has signed a Commercial Facilities Agreement with various Financial Institutions and Commercial Lenders. Following are the details of debt raised by Reliance Petroleum limited in the month of October in year 2006: Table 12: Debt Raised by RPL ECB / FCCB ECB ECB Borrowe r Equivalent Purpose Amount in USD 1,500,000,000 New Project 500,000,000 New Project Maturity Period (Aprox) 9 years 7 months 9 years 7 months

Reliance Petroleum Ltd. Reliance Petroleum Ltd.

RPL has raised debt through Approval Route. Reliance Debt Document is one of the finest example of Debt Agreement as it discusses the rights and obligation of all the parties involved (the borrower, Commercial Lender and the Commercial Facilities Agent) in all the possible situations. These Debt documents are comprehensive in nature and generally cover all the possible circumstances.

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INTERPRETATIONS
Commercial Lender Agreements The common terms agreements dates on or about the date of an agreement and entered into between the Commercial Facilities Agent and the Borrower. Availability Period It means the period from the Signing date to the earlier of the date falling 365 days after the Signing date and the date on which the Total Amount has been reduced to nil. Drawdown Date It is the date on which an Advance is made. Facility Office In relation to Commercial Facilities Agent or Commercial Lender, Facility Office is the Office identified with its signature in the debt agreement. LIBOR London Interbank Offered Rate (LIBOR) is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market . It is the interest rates that major international banks charge one another for loans. Majority Comme rcial Lende rs 1) Before any Advance has been made, a Commercial Lender or a group of commercial lender whose commitments amount in aggregate to more than sixty-six and two-third (66 2/3) per cent of the Total Available Amount. 2) After the Advances have been made, a Commercial Lender or a group of commercial lender to whom in aggregate more than sixty-six and two-third (66 2/3) per cent of the Total Loan is owed.

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Transfer Certificate It is a certificate signed by the Commercial Lender and the Transferee whereby Commercial Lender seeks to procure the novation in favor of Transferee of rights and obligation under the Financial Documents. Weighted Ave rage Drawdown Date It is the date determined by the Commercial Facilities Agent on the earlier of i) ii) The date on which the Available Commitment is reduced to zero The last day of the Availability Period in accordance with below formula

Where N is rounded up to the nearest whole number. WAL is the weighted aggregate Advances being the aggregate of the number of days from the signing date to the date on which that advance was made, multiplied by the initial principal amount of the Advance. Purpose a) The Facility is intended to finance Project Costs. The borrower shall apply all amounts raised by it in compliance with the circulars on External Commercial Borrowings issued by the Reserve Bank of India and all other applicable laws and regulations of India. b) Without prejudice to the obligations of the borrower under the above clause, neither t he Commercial Facilities Agent, the Lead Arranger and the Commercial Lender nor any of them shall be obliged to investigate the application of amount raised by the Borrower. Nature of Comme rcial Lende r’s Right and Obligations 1) The failure of a Commercial Lender to perform its obligation shall not affect the obligation of the Borrower towards any other party. 2) Other party is not liable for the failure by a commercial lender to perform its obligation.

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3) The amount outstanding at any time from the Borrower to each of the parties shall be a separate and independent debt. 4) If not expressly provided in the Finance Documents, each party is entitled to protect and enforce its individual rights.

Availability of the Facilities The Borrower may utilize facilities if: 1) The Commercial Facilities Agent receives a Notice of Drawdown from Borrower before a certain period from the proposed date for making the proposed Advances. The receipt of such notice obliges the Borrower to borrow the amount on a particular date subjected to certain terms and conditions. 2) The amount of Advance requested from each Facility is same when expressed in the percentage term of Available Amount from that Facility. 3) The proposed date of making the proposed Advances is a business day during the Availability period. 4) The aggregate principal amount of the proposed Advances is at least of a certain amount (Amount confidential to the company) or equal to Total Available Amount (if it is less than a certain amount (Amount confidential to the company)). If a Commercial Lender‟s Facility Commitment is reduced in accordance with the term mentioned in the agreement, after the Commercial Facilities Agent has received a Notice of Drawdown, then the amount of the proposed Advances shall be reduced accordingly. Security And Subordination The term loans from banks are secured by a first ranking pari passu mortgage over leasehold interests under the Land Lease Agreement and the fixed assets (including plant and machinery) of the Project of RPL; A first ranking pari passu charge over movable assets (other than current assets and investments) of the Project;

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A floating second ranking charge over such of the company‟s current assets relating to the Project that are charged on a first ranking basis to the working capital lenders and an assignment of Company‟s right, title and interest under the key Project Agreements including agreements in respect of utilities. Inte rest Period The period for which an Advance is outstanding shall be divided into successive period each of which shall start on the last day of the preceding period. The duration of the interest period relating to an Advance can be one, three or six months (or such other period as the Borrower and the Majority Commercial Lenders may agree) as the Borrower may select in the Notice of Drawdown. If the borrower fails to give such notice of its selection of an Interest Period, the duration of that interest period shall be six months. These interest periods are required as it facilitate the Borrower to pay interest t o those Commercial Lenders who are listed by the end of the interest period. Inte rest 1) On the last day of each interest period the borrower shall pay accrued interest on the Advance. 2) After the start of each Interest Period, the Commercial Facilities Agent shall notify the Borrower of the amount of interest to be paid and the due date of payment. However, the failure of Commercial Facilities Agent to provide such notification, does not in any way affect on the Borrower‟s obligation to pay the same. 3) The date upon which the Borrower shall be obliged to make payments is determined in accordance with Common Term Agreement. 4) The rate of interest applicable to an Advance is the sum of LIBOR on the Quotation Date for the interest period and the Applicable Margin.

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Repayment The Borrower shall repay the Loan by repaying (on each repayment date) an amount (confidential to the company) outstanding at the end of the Availability Period. Cancellation and Prepayment: 1) The Borrower may cancel the whole or any part of the Total Available Amount after giving a notice to Commercial Facilities Agent. This notice should be given in 7 business days in advance. Any cancellation under this clause shall reduce the Commercial Lender‟s Commitment on pro rata basis. 2) Any amounts undrawn at the end of Availability Period shall be cancelled and the Commercial Lender‟s Commitment shall be reduced to nil. 3) If the Borrower has given a notice of prepayment to Commercial Facilities Agent not less than 7 business days in advance, he has to prepay the whole or any part of Advance on the last day of Interest Period. 4) The notice of prepayment given by borrower is irrevocable in nature. It should specify the date upon which such repayment is to be made. 5) Any repayment made shall satisfy the borrower‟s remaining obligation under repayment clause. 6) The Borrower shall not repay or prepay all or any part of any Advance except at the times and in the manner expressly provided in agreement. The borrower shall not be entitled to reborrow any amount repaid or prepaid. 7) The Borrower is liable to obtain all approvals from all relevant authorities in India that may be required in connection with any repayment, prepayment or cancellation. This approval has been obtained by borrower at its own cost. Taxes The financing parties should receive a net amount which shall be free from any deductions based on tax. It implies that the amount receivable by the financing party should be before deducting the taxes.

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If the financing party is required to make any payment on account of tax which should have been paid by the borrower, the borrower should indemnify the financing party with the required amount. The financing parties or its affiliates are not obliged to disclose their tax policies to the borrowers. When the financing party claims for indemnification, it should use its reasonable efforts to file the required documents and forms so as to avoid the increase in the amount and should notify the other party as well. The documents required to be done includes the fo llowing: a. Tax residency certificate issued by the tax authority of the country in which the Financing Party is the resident. b. Certificate of incorporation of the financing party. c. Certificate confirming no permanent establishment in India or if a permanent establishment exists in India, then a certificate confirming that income under the Finance documents is not attributable to the permanent establishment in India. d. Authority letter under Section 195 of the Income Tax Act 1961 of India authorizing the Borrower to make an application for an exemption from that Section 195. e. Any duly authorized translated copies of any original tax residency certificate or certificate of incorporation which is in a language other than English. Increased Cost If, by reason of any change in law or in its interpretation of for compliance with the request of central bank, the Commercial Lender or any holding company of Commercial Lender incurs an increased cost because of entering in to the agreement or performing obligations of this agreement or maintaining a commitment under this agreement then the Borrower shall from time to time (on the demand of Commercial Facilities Agent) pay to the Commercial Facilities Agent for the account of increased cost of Commercial Lender. No Commercial Lender is permitted to recover

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1) Any cost which has accrued more than 180 days prior to the receipt by the Commercial Facilities Agent of the notice regarding the cost incurred. 2) Any cost which has accrued due to own gross negligence or willful misconduct.

Any Commercial Lender intending to pursue such claim should notify the Commercial Facilities Agent of the event by reason of which it is entitled to do so and a statement as to whether or not the Commercial Lender is making such claims against other Borrowers. Substitution of Commercial Lender: In the event that any Commercial Lender shall claim payment of any cost referring to Tax Gross up, Tax Indemnity or increase in cost, the Borrower has the right (provided that no Event of Default has occurred) to replace such Commercial Lender with another Commercial Lender or other Financial Institution. These replacements should be reasonable acceptable to the Commercial Facilities Agent and no other Commercial Lender should be liable to replace the claiming Commercial Lender. The claiming Commercial Lender to be replaced shall (on the date as specified by the Borrower in the written notice to the Commercial Lender) transfer the rights, interest and the other entire amount owing to such Commercial Lender. The relevant Commercial Lender should provide a Transfer Certificate for the same. However, if the claiming Commercial Lender fails to comply with its obligation, the Borrower shall not be obliged to make any payment to such Commercial Lender in respect of any cost or liability accruing after the date specified in the written notice. Illegality If, at any time, it is unlawful for a Commercial Lender make Advance to the Borrower, then Commercial Lender (after becoming aware of such fact) should deliver a certificate to the Borrower through Commercial Facilities Agent and 1) Such Commercial Lender shall not be obliged to make Advance to the Borrower thereafter and amount of its commitment shall immediately be reduced to zero.
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2) The Borrower shall repay such Commercial Lender‟s share of outstanding Advance, the accrued interest and all other amounts owing to such Commercial Lender. Such payments should be made within 30 days of the date of that certificate.

Mitigation If, in respect of any Commercial Lender, circumstances arise which result in: 1) An increase in amount of payment to made to it under Tax Gross-up 2) A claim of indemnification pursuant to Tax Indemnity 3) The prepayment of part of the Advance under clause of Illegality Then, without in any way limiting the obligations of the Borrower, the commercial lender shall notify the Commercial Facilities Agent (who in turn shall notify the Borrower). Then, in consultation with Commercial Facilities Agent and the Borrower, the Commercial Lender should take steps to mitigate the effect of such circumstances. These steps might include transfer of Commercial Lender‟s Facilities Office to another jurisdiction or transfer of its right and obligation to another financial institution who is willing to take part in the Advance. This can only happen when Commercial Lender is under no obligation to avoid such step as in its bona fide opinion it would have an adverse effect on its business or financial condition. The above stated steps can only be taken when Commercial Lender is not obliged to disclose any information relating to its business Event of Default The following events describe the circumstances which constitute an Event of Default for the purpose of Finance Documents: 1. Failure to pay: The relevant amount should be paid in full within 5 business days of the due date for payment of such amount. 2. Misrepresentation: Any statement which is incorrect or misleading should be altered to the reasonable satisfaction of the Required Majority Commercial Lenders within 30 days of the notice from the Commercial Facilities Agent to the Company.
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3. Financial Requirements: The Company‟s financial condition as at each 31 March and each 30 September commencing 12 months after the Commercial Operations Date do not satisfy the required ratio requirements. 4. Completion Date: The Completion Date does not occur on or before 31 December 2010. 5. Winding-up: The Company takes any action to start its winding up, dissolution or reorganization on liquidation. 6. Unsatisfied Judgment: A judgment, decree or order made against the Company is not stayed or complied with within 90 days and the failure to comply with such judgment, decree or order is reasonably likely to have or result in a Material Adverse Effect. 7. Changes of Control: At any timea. RIL and/or any of its Affiliates cease to be the direct legal and beneficial owner of at least 51% of the issued and outstanding equity share capital of the Company, or b. RIL (either directly or indirectly through its Affiliates) ceases to have control of the Company. 8. Repudiation: a. RIL repudiates the RIL Undertaking. b. The Company repudiates any Finance Document to which it is a party. c. Any counterparty to any Key Project Agreement or any other Agreement and such repudiation by the counterparty would have or result in a Material Adverse Effect. 9. Consents: Any Consent is suspended, cancelled, revoked, forfeited, surrendered or terminated or is varied or modified and such event will have or result in a Material Adverse Effect. 10. Abandonment: For any reason the Company abandons the construction or the operations and maintenance of the Plant. The advance and the other amount owed by the Borrower to the financial parties shall become immediately due and payable upon the declaration by Commercial Facilities Agent. In the Event of Default Commitment of each Commercial Lender shall be cancelled. Default Interest and Break Cost: Default Interest Period: If any sum due and payable by the Borrower to a Financing Party under the Agreement is not paid on the due date it becomes the unpaid sum. The period beginning on
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due date and ending on the date upon which the obligation of the Borrower to pay such sum is discharged is divided into successive periods. The duration of each is selected by the Commercial Facilities Agent and these periods are called Default Interest Period. Default Interest: During each default period, the unpaid amount shall bear interest at the rate per annum.

If, for any such period, LIBOR cannot be determined then the rate per annum applicable to unpaid sum will be

This rate decided by Commercial Facilities Agent is the arithmetic mean of the rates notified by each Commercial Lender to the Commercial Facilities Agent before the last day of such Default Interest Period. Payment of Default Interest: Any interest accrued in respect to unpaid sum shall be due and payable by the Borrower at the end of the Default Interest Period or on any other date as specified by Commercial Facilities Agent in a written notice to Borrower. Notification of Default Interest: the Commercial Facilities Agent should promptly notify the Borrower and the Commercial Lender of determination of any default interest. If the calculation of Interest is error free then it would be conclusive and binding by both Borrower and Commercial Lender. Break Cost If the Commercial Lender receives any part of unpaid sum on the last day of an Interest Period, the Borrower shall pay an amount by which 1) The additional interest which would have been payable on the amount so recovered exceeds 2) The additional interest which in the reasonable opinion of the Commercial Facilities Agent ,
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would have been payable to the Commercial Facilities Agent on the last date of the interest period in respect of a deposit of the unpaid sum equal to the amount so received. Indemnity Borrower‟s Indemnity: The Borrower undertakes to pay Commercial Facilities Agent: 1) An amount sufficient to indemnify each Financial Party against any reasonable cost which it may incur as a consequence of the occurrence of any Event of Default. 2) An amount sufficient to indemnify each Commercial Lender against any loss it may suffer as a result of its funding a portion of Advance. The Financial Parties should not assert against any director, officer or employee of the Borrower for any claim it has against Borrower. Currency of Account and Payment: A currency of Account and Payment is explicitly mentioned in the agreement. Payment On the date on which certain amount is to be paid by the Borrower to the Financial Parties, the Borrower shall make available to the Commercial Facilities Agent the due payment in the currency earlier mentioned in the agreement. Alte rnative Payment Agreement If, at any time, it shall become impracticable for the Borrower to make any payment then: 1) The Borrower may agree with the Financing Party an alternative arrangement under Indian Law. 2) The Borrower is obliged to notify the Commercial Facilities Agent of the agreement so reached between it and the Financial Party. No Set off: All payments required to be made by the Borrower under the Financial Document shall be calculated without any set-off or counter claim.
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Claw back: When the sum is to be paid to the Commercial Facilities Agent for account of another person, the Commercial Facilities Agent is not obliged to pay the amount to the person unless it is sure that it has received the requires amount. Payment on Business day: If any payment is due on a non-business day then the payment should be made on the succeeding business day (if it is on the same month of the calendar) or on the preceding business day. Sharing Among the Comme rcial Lende rs If the amount recovered by the Commercial Lender from the Borrower is more than the amount it should have received 1) It shall pay the Commercial Facilities Agent an amount equal to such excess amount 2) The Commercial Facilities Agent should treat this a mount as the one received from the Borrower and shall pay it to the entitled person. Fees Commercial Facilities Agent: The Borrower shall pay to the Commercial Facilities Agent for its own account the agency fees specified in the letter of even date on a specific date as mention in letter. Commitment Fees: a) The Borrower shall pay Commercial Facilities Agent a commitment fees computed at the rate of certain per cent per annum on the Commercial Lender‟s commitment from day to day during the period beginning on the date falling 120 days after the Signing Date and ending on the last day of the Availability Period. b) Commitment fees shall be payable on the date falling six months after the Signing Date and thereafter quarterly in arrears until the last day of the Availability Period.

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Cost and Expenses The Borrower from time to time (on demand of the Commercial Facilities Agent) reimburse the Commercial Facilities Agent and the Lead Arranger (on presentation and delivery of all details, invoice for all reasonable costs and expenses) incurred by it in connection with the proceeds of the Advance arrangement. The Borrower shall pay all Indian Stamp, registration and other taxes. Commercial Lender’s Liability to Cost If Borrower fails to perform any obligation in above stated clause, each Commercial Lender in proportion borne by its share of the Advance to the total amount of Advance, indemnify the Commercial Facilities Agent against any loss incurred by it as a result of failure from the Borrower. Assignment and Transfer by the Borrowe r The Borrower is not entitled to assign or transfer rights, benefits or obligation except on case of merger or consolidation. Assignment and Transfer by Comme rcial Lender Commercial Lender may at any time assign its rights and benefits under the Financial Document. For this they need the prior approval from Borrower unless: 1) Borrower has not shown its concern within 10 days after the Commercial Lender‟s request for the same. 2) Or an Event of Default has occurred. If a Commercial Lender wishes to transfer all its rights and interests, then it may effective after the delivery of a duly completed Transfer Certificate to the Commercial Facilities Agent and the Borrower. On the date at which the novation takes effect, the Transferee in respect of such transfer is liable to pay to the Commercial Facilities Agent for its own account transfer fees of certain amount (Confidential to the Company)

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If the Commercial Lender is to be merged with any other person, such Commercial Lender at its own cost shall furnish Commercial Facilities Agent with: 1) An original copy of a legal opinion by a qualified legal counsel confirming that all such Commercial Lender‟s assets, rights and obligations have been duly vested in the succeeding entity. 2) A original copy of a written confirmation by legal counsel acceptable to the Commercial facilities Agent that English Law and the law of the jurisdiction in which the Facility Office of such Commercial Lender is located recognize such merger under the relevant foreign laws 3) A duly executed Transfer Certificate If the Commercial Lender, following any merger, does not comply with the requirement under then the Commercial Facilities Agent shall have the right to decline to recognize the succeeding entity. General Agency Provision Commercial Facilities Agent is not the trustee of any other person as per the Agreement. None of the Lead Arranger or the Common Facilities Agent is bound to account to any other Financial Party for any sum received by it for its own account. The Common Facilities Agent, the Lead Arranger and the Commercial Lenders: Each Lead Arranger and each Commercial Lender appoints the Commercial Facilities Agent to act as its agent in connection with the Finance Documents. The Commercial Facilities Agent may assume that 1) Any representation made by the Borrower or any other person in connection with any Transaction Document is true 2) No Event of Default has occurred 3) No change is circumstances has occurred 4) None of the parties under transaction document is in breach of its obligations 5) Any right, power vested upon the Commercial Lenders has not been exercised
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unless its agency department has, in its capacity as agent for Commercial Lender, received actual notice to the contrary from any other party. The Commercial Facilities Agent shall: 1) Promptly inform each Commercial Lender of the content of any notice or document received by it in its capacity as Commercial Facilities Agent form the Borrower 2) Promptly inform each Commercial Lender of the occurrence of Event of Default, change of circumstance. Commercial Facilities Agent and the Commercial Lender are not bound to: 1) Account for any Commercial Lender for any sum received by it for its own account 2) To disclose to any other person any information if such disclosure might constitute a breach of any law Each Commercial Lender from time to time indemnify the Commercial facilities Agent in the proportion of its share of the Advance against any cost, claim, losses which Commercial Facilities Agent may incur. If the Commercial lender owes any amount to the Commercial Facilities Agent under the agreement, the Commercial Facilities Agent may (after giving a notice to that party) deduct the amount from the payment it is obliged to pay to that party. The Commercial Facilities Agent may resign from its appointment at any point of time without assigning any reason by not giving less than thirty days prior notice. But no such resignation shall be effective until a successor for the Commercial Facilities Agent is appointed. If the Commercial Facilities Agent gives resignation then any reputable Commercial Lender or

other financial institution may be appointed as a successor with the prior approval of the Borrower. But if no successor is appointed within the notice period, then Common Facilities Agent may appoint such a successor itself. Majority Commercial Lenders may remove the Commercial Facilities Agent from its appointment as agent at any time by giving not less than 30 days prior notice.

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If the Majority Commercial Lenders remove the Commercial facilities Agent from its appointment any reputable Commercial Lender or other financial institution may be appointed as a successor with the prior approval of the Borrower by the Majority Commercial Lenders. If no Commercial Facilities Agent accepts its post as a successor by the date falling after 60 days of Commercial Facilities Agent‟s resignation, the resignation shall nevertheless become effective from that date and the Commercial Lenders shall perform all duties of the resigning Commercial Facilities Agent. In acting as Commercial Facilities Agent for the Commercial Lender, the Commercial Facilities Agent‟s agency division shall be treated as a separate entity from any other of its division or department. Calculations & Certificates Any interest or fee accruing under a Financial Document will accrue from day to day and is calculated on the basis of the actual number of days elapsed and a year of 360 days, provided that interest or fees in respect of any day shall accrue only once. The Commercial Facilities Agent shall maintain on its books a control account in which the following shall be recorded: i. The amount of the advance made or arising hereunder and each Commercial Lender‟s share therein, ii. The amount of all principal, interest and other sums due or to become due from the Borrower to any of the Commercial Lenders hereunder and each Commercial Lender‟s share therein and, iii. The amount of any sum received or recovered by the Commercial Facilities Agent hereunder and each Commercial Lender‟s share therein. Confidentiality The Commercial Facilities Agent and Commercial Lenders may disclose to any potential Transferee who may be considering entering into contractual relation with the Commercial Facilities Agent or Commercial Lenders only if
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1) Required and permitted by applicable law or applicable regulation 2) Required for accounting purpose if the professional adviser execute and deliver a confidentiality agreement. 3) It is in connection with any legal proceedings taken against Borrower 4) It is in public domain Amendments and waivers The Borrower and the Commercial lenders should agree in writing to opt for any amendment, variation or waiver in the Commercial Facilities Agreement. Any such amendment, variation, supplement or waiver which changes or is related to the rights or obligations of the Commercial Facilities Agent shall require its agreement regarding the same. Decision Making If any consent, approval or decision is required by some or all the Commercial Lenders, then Commercial Facilities Agent shall promptly upon becoming aware of the requirement, advise each Commercial Lender specifying whether the decision is to be taken by all the Commercial Lenders or the Majority of the Commercial Lenders and shall also specify the time within which the decision should be taken. Each decision taken in accordance of the above stated clause shall be promptly notified to all the other parties by Commercial Facilities Agent. Governing Law The agreement also explicitly mentions the governing law that will be applicable for the agreement. Financial Condition and Covenants 1. FINANCIAL CONDITIONS Ratio Requirements: The Company shall ensure that its financial condition as at each 31 March and each 30 September commencing after the Commercial Operations Date, as evidenced by a Compliance Certificate and, in the case of its financial condition as at 31 March in any year.
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The following ratios should be maintained as per the requirements of the Agreement: a. Tangible Net Worth b. Ratio of Total Long Term Secured Debt to Total Fixed Assets c. Ratio of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) d. Ratio of Total Long Term Debt to Tangible Net Worth e. The Debt Service Coverage Ratio 2. POSITIVE COVENANTS a. Construction, Operation and Maintenance: The Company shall ensure that in all material respects the Plant is designed, engineered, operated, maintained and repaired in accordance with Good Industry Practice and all the material Applicable laws. b. Obligations under Project Agreements: the Company shall comply with, in all material respects all of its obligations under all the Agreements. c. Security Documents: the company shall within 180 days of the signing date, execute and deliver the necessary documents to the Security Trustee. d. Application of proceeds: the company shall apply the proceeds of all utilizations under each of the commercial facilities agreement only for purposes permitted under the commercial facilities agreement. e. Compliance with law and environment standards: the company shall comply in every material respect with all the material applicable laws. f. Consents: the company shall obtain on a timely basis and do all that is necessary to maintain in full force and effect, all consents required by it and make all filings, notifications and notarizations, in each case, which at any time or from time to time it is required to obtain or make. g. Taxation: the company shall file all tax returns required to be filed by it and promptly pay all taxes to which it is assessed liable as they fall due.
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h. Corporate existence: the company shall do or cause to be done all things necessary to preserve and keep in full force and affect its corporate existence and authority to conduct its business. i. Accounting systems: the company shall maintain adequate accounting, management information and cost accounting systems for the Project and shall engage Auditors to audit the financial statements annually. j. Insurance: the company shall effect and maintain or cause to be affected and maintained in full force and effect contracts and policies of insurance as stipulated in the agreements. 3. NEGATIVE COVENANTS a. Change of business: the company shall procure that no substantial change is made to the nature of its business. b. Shares: the company shall not issue any new shares or alter any rights attaching to any of its shares if the result of so doing would be that RIL and/or its affiliates cease to be the beneficial owners of at least 51% of its issued share capital. c. Investments: the company shall not make any investments or acquisitions in any unrelated business ot her than from the company‟s retained earnings or from the additional equity amount provided that such investment in any unrelated business is not of a nature that may result in the company incurring liability beyond the loss of the investment or acquisition itself. d. Mergers: the company shall not voluntarily take any steps intended to result in its merger, amalgamation or consolidation with any other person unless the legal entity into which the company is merged or consolidated agrees in writing with the commercial facilities agents that it will assume all the obligations and liabilities of the company under the finance documents and the permission of all the commercial lenders has been obtained.

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e. Financial indebtedness: the company shall not incur or allow to remain outstanding any indebtedness for borrowed money other than permitted financial indebtedness.

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PORTFOLIO TRACKER VERSION 0.0
Portfolio Tracker is software which is freely available on internet by different financial sites. I have made an effort to create similar software which can be used to keep a track of portfolio and which will also tell the user about any arbitrage opportunity which is available due to price variation at NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) at different point of time during a single day. INTRODUCTION Portfolio Tracker is software that can help in calculating the gain or loss on the stocks of a portfolio. This software pulls the current prices of the shares from NSE and BSE sites at a definite interval. It compares the current price with the purchase price and hence calculates the profit or loss on the stock. This software is made using the functions of Microsoft Excel 2007. GOAL AND OBJECTIVE 1) To calculate the profit or loss of an investor on a given portfolio based on the current market situation. 2) To find out the arbitrage opportunity based on price difference at NSE and BSE market. 3) As every investor does not have time to regularly keep a track of their portfolio at a single point of time, this software helps them to watch and monitor their portfolio as soon as they open this excel sheet along with the internet connection. STATEMENT OF SCOPE The software takes name of the share, total number of shares bought and the average purchase price as input and fetches the current market value of those shares. The software calculates the total profit or loss and percentage of the same. We can also extend the scope according to the use of investor or personalize the working of the program according to the needs of investor. Portfolio Tracker also compares the NSE and BSE prices every minute and recommends the arbitrage strategy to the user. We can also extend the scope of same for currency hedging. The Software is password protected; hence the user can prevent mishand ling of his personal portfolio and can keep the data confidential.
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MAJOR CONSTRAINT 1) The software updates the prices at particular interval; hence the change in prices for less than a minute cannot be accommodated in it. This might become a shortcoming while deciding the arbitrage strategy as the stock prices changes at every fraction of seconds. 2) The software requires internet connection. 3) It takes average purchase price as an input instead of taking different purchase quantity at different purchase prices. USER PROFILE A common man dealing in share market can use the software for personal portfolio tracking. FUNCTIONAL MODEL AND DESCRIPTION 1) Profit and Loss Calculation: First function of the software is used to calculate the profit and loss for the entered portfolio of the user. This function requires following inputs from the user: a. Script code for BSE and script name for NSE b. Buy Date c. Total number of shares bought d. Average Buy Price Once these inputs are available to the software, it takes the name of the share and matches it which the data available from the NSE site using the VLOOKUP function. Buy price is compared which the current market price and If (Current Price > Buy Price) { GAIN; } Else { LOSS; }

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Amount of Gain (Loss) per share is calculated by following formula: – Total Gain (Loss) is calculated by multiplying the Gain (Loss) per share with the total number of shares bought.

Percentage of Gain (Loss): Annualized:

Absolute:

VLOOKUP Function: The V in VLOOKUP stands for vertical. It searches for a value in the first column of a table array and returns a value in the same row from another column in the table array. Syntax: VLOOKUP (lookup_value, table_array, col_index_num, range_lookup) Where, Lookup_value is the value to search in the first column of the table array. Table_array is the array from where the value is to be matched. The first column of table_array is searched for lookup_value. Col_index_num is the column number of table_array from where the value is to be fetched.

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Range_lookup can have any of the two values (False or True). For exact match false is used and true is used for approximate match, where the next largest value that is less than lookup_value is returned. 2) Recommendation of Arbitrage Strategy: An arbitrage is the simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time. The function of the software recommends the users an arbitrage opportunity for his portfolio. It compares the NSE and BSE stock prices for shares of the portfolio and based on those prices it calculates the Arbitrage opportunity. If (NSE Price == BSE Price) { Arbitrage Opportunity = NO } Else { Arbitrage Opportunity = YES } Arbitrage Strategy: Now, following function is used for calculating the recommendation for arbitrage strategy: If (Arbitrage Opportunity == YES) { If (NSE Price > BSE Price) { Arbitrage Strategy = BUY BSE, SELL NSE; } Else { Arbitrage Strategy = BUY NSE, SELL BSE; } Else { Arbitrage Strategy = “- “; }
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Arbitrage Gain/Loss: The software also calculates the Gain (Loss) per share because of the arbitrage. Following formula is used for the same:

ROAD AHEAD The software is currently launched with basic features of portfolio tracker. It can be further enhanced by making changes. Few of the enhancements suggested are: 1) Instead of the taking the hard coded value for the purchase price, a function can be developed which takes the purchase price and number of shares purchased as input and thereby calculate the Average Price. This will help the user the update his current purchase and hence automatically calculate his new Average Purchase Price. 2) This can be extended to monitor currency prices and take necessary actions at desired point of time to make profits. 3) Through this technique, we can not only calculate or monitor the stock prices but can also use it to retrieve data that can automatically be refreshed and takes no time to monitor the changes taking place.

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MERGER OF RPL WITH RIL
Consolidation or amalgamation can be termed as the merger of two or more companies into one. Under the Halsbury's Laws of England, amalgamation is defined as "a blending together of two or more undertakings into one undertaking, the shareholders of each blending company, becoming, substantially, the shareholders of the blended undertakings. There may be amalgamations, either by transfer of two or more undertakings to a new company, or to the transfer of one or more companies to an existing company". Therefore, the two concepts are, substantially, the same, but the term amalgamation is more common. The merging of two or more entities into a single entity is known as amalgamation. Such actions are commonly voluntary in nature and involve stock swap or cash payment to the target. Stock swap is often used as it allows the shareholders of the two companies to share the risk involved in the deal. There are certain reasons which are the major sources of motivation for the merger of two entities. These reasons are also common to the merger of RIL-RPL.

Synergy : It refers to the fact that the combined entity can often reduce the fixed costs and other operating costs by removing duplicate departments or operations, thereby, lowering the costs of the company relative to the same revenue stream, thus increasing profit margins. The merger of RIL-RPL is also said to provide the merged entity with the financial and operational synergies. This is because the nature of the existing refinery and the new refinery is same and also the improved capacity and the complexity would give RIL the necessary reduction in the costs of operations.

Increased revenue or market share : RIL will be amalgamating its subsidiary company (RPL) and by doing this, it would be increasing its market power by capturing increased market share to set prices.

Economy of scale : The merged entity would result in the creation of the refinery which would be the world‟s largest refining capacity at a single location. The increased complexity and capacity of the new refinery would help the company to maximize the GRM.
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Taxation: Availing the tax benefits is another major incentive for the two companies to opt for merger. But in the case of the merger of RIL-RPL, the merger will be tax neutral as after the merger both the entities will continue to enjoy the same tax benefits which they are currently enjoying. Therefore, on a consolidated basis, RIL will get the benefits of being an Export Oriented Unit and RPL will enjoy the SEZ benefits.

In 2002, RPL, which was the first refinery project, merged itself with its parent company RIL. Now after 7 years, RPL is once again merging with RIL. Present RPL was incorporated in October 24, 2005 to set up the second mega refinery complex. Though the market was surprised by the announcement of the merger between RIL and its subsidiary RPL, it was expected to happen owing to the strategic fit and the changes in the global scenario. The merger of RPL with RIL seems to be a strategic move as it would enable RIL to enjoy Economies to Scale in production and refinery of petrochemicals. It would also help in minimizing the cost of capital and capitalize on the cash flow of RPL. The merger of Reliance Industries Limited (RIL) and Reliance Petroleum Limited (RPL) will result in the creation of a petrochemical behemoth which would encompass the entire value chain in the business of petroleum giving the merged entity the necessary clout to take on the competition on the national and international level. According to media reports, the merger will create a new entity which will have a combined market value of about Rs.233,384 crores. Reliance Industries Limited, after the merger, will become the world‟s largest refining capacity at a single location. Also, it would become the fifth largest polypropylene manufacturer. The two firms after the amalgamation will continue to function as separate entities from the accounting point of view and therefore, the tax benefits available to RIL as an Export Oriented Unit and to RPL as a Special Economic Zone will be independent from each other. In fact, this merger will give RIL greater flexibility in operational planning. RPL had its IPO in April 2006. At that time RIL had 75% stake in the company. RIL and Chevron were the joint promoters of the company with a stake of 15% and 5% respectively. But in November 2007 RIL sold its 4.01% equity stake in Indian Stock Exchange. With this RIL was left with 71% of equity shares in the company.
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According to the contract between Chevron and RIL, Chevron has an option to hike its stake up to 29%. For this it will have to buy 24% equity shares from RIL. This leaves RIL with only 47% (71-24) stake in RPL, hence reducing it below 51%. Now, let us look at the probability of Chevron hiking its stake. Following are the reasons, which make it highly unlikely: Very High Cost to Chevron: If Chevron raises its stake to 29% then it has to buy the shares from RIL at 5% discount to market price. The amount involved would be very costly for the company, which would be almost the cost of RPL refinery at the current market prices. Hence to raise its stake by 29% it has to bear almost complete refineries cost. RIL’s stake sales: When in November 2007 RIL sold off its 4.01% stake in RPL, it became further more unlikely for Chevron to raise its stake in RPL. As it will leave RIL with less than 51% shares in Reliance Petroleum Limited. Now, it cannot be the case that RIL does not mind letting its stake go below 51% as the debt agreement clearly states that an Event of Default will occur if RIL‟s share goes below 51% in RPL. RPL can source crude on its own: As the existing refineries of RIL, RPL also seems confident of sourcing crude on its own. Hence the hike of stakes of Chevron seems rather unlikely. From the above stated points we can see that in November 2007 only it became almost clear that RIL might take a step of merging RPL. RIL has had a history of merging its subsidiaries involved in refining petrochemicals. The old RPL which started its operation in FY01 was finally merged with RIL in FY02. IPCL (acquired by RIL in FY03 as a part of privatization in India) was merged in RIL in FY07. Thus, when on March 2, 2009 RIL finally announced the merger of RPL into RIL, it shouldn‟t have come as a shock to the market.

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SYNERGY OF THE MERGER
RIL to maintain its refining margin well ahead of its competitors, it has contracted with crude oil suppliers for the cheaper heavy sour crude. Moreover, the product blends from the two refineries will also help RIL to produce fuel which matches the Euro 4 and Euro 5 grades, which is a requirement of the western markets.

The RPL refinery will be one of the most complex refineries in the world with a Nelson Complexity Index of 14.0 which will enable the refinery to process various varieties of crude to produce superior quality products which are able to meet the stringent specifications and command price premiums. This is a significant competitive advantage in the current industry scenario of increasingly heavy and sour new crude finds. As the location of the two refineries is adjacent to each other, it provides a strong base for the company to explore the locked synergies between the two refineries. The ability of the merged entity to buy and process different forms of crude (including the heaviest crude) owing to the improved complexity will help the company in lowering its buying cost thereby increasing the overall GRM.

Apart from this, the merged entity will also capitalize on shipping freight flexibilities to overcome the hurdles posed by the Indian customs authorities that do not allow two companies to load products in a single vessel. Therefore, the merger will help the merged entity in unlocking the financial and the operational synergies that exist between RIL and RPL.

The merger would enable RIL to have improved Cash Flows and Balance Sheet along with a lower cost of capital which would in long run benefit the shareholders of the merged entity. The RIL-RPL merger will also result in the optimization of the supply chain as the combined refining capacity of the company will be 1.24 million barrels every day and the ability to deal with the supply chain, the ability to steadfast in transportation is more for the merged entity. Also, the merged entity will save on the dividend distribution tax paid by RPL on distributing dividends at 17.99% to its shareholders.

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SWAP RATIO
The Board of Directors has approved the merger of Reliance Petroleum Limited with Reliance Industries Limited for a swap ratio of 1:16. This means that for every 16 shares of RPL, 1 RIL share would be issued. The RIL board has approved a scheme of amalgamation of Reliance Petroleum with the company under the provisions of Sections 391 to 394 of the Companies Act of 1956. Under this scheme, the RPL‟s shareholders will get 1 fully paid equity share of Rs 10 each of RIL for every 16 fully paid equity shares of RPL held by them. The merger follows the philosophy of RIL of creating enduring value for its stakeholders. CRISIL has affirmed an AAA rating for RIL post merger. Merger, however, will reduce the shareholding of institutional investors, while banks and mutual funds will get a higher share in the merged entity. According to some analysts, the merger would result in the fall in the promoter holding by 2% from 49% to 47% which would be due to the cancellation of the treasury stock. The merger would also lead to an increase in the retail shareholding from 16.1% to 19%. The swap ratio of 1:16, which is marginally in favor of the shareholders of RPL, would mean a dilution of 4.4% of RIL‟s equity. The treasury stock which has been created as a result of merger would be extinguished which would prove to be positive for the shareholders of RIL. Therefore, the merger can be said to have a neutral effect on the shareholders of both the company. After the swapping of shares, RIL will have 3.7 million shareholders and the promoter‟s holding would fall to 47%. RIL is currently holding 70.38% in RPL which would be cancelled on absorption. If the swap ratio would have been 1:15, RIL would have to issue 8.89 crore equity shares as against the outstanding 133.3 crore of RPL shares. As a result, RIL‟s equity would have risen to Rs 1,662.65 crore, which amounts to a dilution of just 5.6%. Similarly if the swap ratio would have been 1:17, the dilution of the promoter‟s share in RPL would have been 1.95%.

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Table 13: Dilution of Promote rs

PARTICULARS
Total number of RPL Shares RIL's Stake (including Chevron's) Non-Promoters Stake Number of RPL Shares for 1 RIL Share Number of Shares to Promoter Number of Shares to Non-Promoters Total number of RIL Shares before merger Number of new RIL Shares to be issued in lieu of RPL Treasury Shares to be cancelled Total number of RIL Shares post merger Current Treasury Shares in RIL Net Equity excluding Treasury (Pre-Merger) Net Equity excluding Treasury (Post-Merger) Existing Promoter's Stake Promoter's Stake Post Merger Dilution of promoter's share due to Merger

(%)
75.38 24.62

In Crores
450.00 339.21 110.79 16 21.200625 6.924375 157.30 28.125 21.200625 164.224375

12.64

19.88272 137.41728 144.341655

49.03% 46.96% 2.07%

77.12419 77.12419

The total number of shares of RPL is 450 crores which are represented by the promoter‟s stake which is equivalent to 339.21 crores which accounts for 75.38% of the total number of shares. The remaining 24.62% of the shares are held by the non promoters which is equal to 110.79 crore shares. The swap ratio as decided by the Board of Directors of RIL is 1:16 which implies that for every 16 shares of RPL, 1 share of RIL will be issued. Thus, the number of shares to be issued to the promoters is 21.2 crores and to the non promoters is 6.92 crore shares. The total number of shares of RIL before the merger are 157.30 crores and after the merger the total number of shares will be 164.22 crore shares. This figure includes 28.125 crores shares
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representing the new shares that will be issued in lieu of the shares of RPL and 21.2 crore shares representing the treasury stock which will be cancelled by RIL. Currently, the total number of treasury shares in RIL is 19.88 crores. Hence, after the merger, the promoter‟s stak e will be 46.96% instead of 49.03%. it means that the equity will be diluted due to the merger to the extent of 2.07%.

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INVESTOR’S POSITION
It is believed that the RPL shareholders would benefit in the long term from the merger with RIL. This gain would be due to the following reasons:

1. Gains from upside in the petroleum sector, retail and SEZ: RPL shareholders, after the merger will be gaining from the upsides from RIL‟s petroleum business after merger as the company will be gaining from the strong value accretion due to exploration of the large unexplored acreage in the highly prospective areas. The shareholders of the merged entity will even gain from the upsides in RIL‟s diversification in the organized retail sector and SEZs. 2. Rise more likely in RIL’s earnings: A steady rise in RIL‟s earnings is more likely than in RPL‟s earnings. There has been a secular rise in RIL‟s earnings since its inception in 1964. Because there are a number of subsidiary companies under the group, any decline in earnings of one subsidiary is set off against the increase in the earnings of the other subsidiaries. That is, RIL‟s earnings decline in any one business is neutralized by strong growth in other businesses. This would not have been possible in the case of RPL as its earnings are mainly from refining only. 3. Diversification of risk of minority shareholde rs: The merger will diversify the risk of minority shareholders of RPL as it would be shifting from standalone refinery to an integrated unit like RIL. Due to the downturn of the refining sector post global slowdown had increased risks for RPL as a standalone unit. Therefore, the merger with RIL would expose RPL shareholders towards a relatively stable exploration business, integrated refining and petro-chemical business and emerging retail business. 4. Industry scenario: The demand is expected to rise through the year 2010 at a rate of about 2% per year for oil and 3% per year for gas. Moreover, in the recent past there has been an increase in the demand for oil and gas. It is expected that the demand for oil and gas will continue to increase as they are expected to remain the leading energy sources for some time to come. Also increase in the exploration and production is expected due to advancement in the technology. Therefore, it would be safe to assume that the shareholders of RIL will be able to earn regular a nd consistent dividends along with the capital appreciation in the stock prices.
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5. Issue price: The RPL issue price was Rs 60 per share and the proposed swap ratio and the current market price is higher than the issue price. In a market which has seen so much of turmoil in the last 12 months, the swap ratio can be considered as appropriate for the shareholders of both the companies.

Table 14: Swap ratio DATE 27-Feb-09 2-Mar-09 3-Mar-09 4-Mar-09 1-Apr-09 2-Apr-09 6-Apr-09 8-Apr-09 CLOSING PRICE OF RIL 1,265.05 1,225.15 1,199.05 1,209.60 1,579.45 1,662.50 1,672.25 1,724.05 CLOSING PRICE OF RPL 76.20 75.15 73.35 74.00 98.30 103.60 104.20 107.80 RATIO 16.60 16.30 16.35 16.35 16.07 16.05 16.05 15.99

From the above table, we can see that the ratio of the market price of RIL and RPL on the date of the announcement of the merger i.e., February 27, 2009 was 16.6. On the date of the announcement of the swap ratio for the merger i.e., March 2, 2009, the ratio of the market prices of the two companies was 16.3. For the next week, the ratio remained approximately equal to 16. On April 1, 2009, the date from which the merger was to be effective, the ratio still remained 16 (approx). Only after April 8, 2009, the ratio fell slightly below 16. Therefore, it can be said that the shareholders who purchased the shares of RPL during this time made a breakeven decision as the ratio of the market price of the shares of the company is almost equal to the swap ratio that has been decided for the merger. Hence, the swap ratio will put the RPL shareholders in the same position after the merger as the shareholders of RIL as they are in now. Thus, the question that arises for the stakeholders is not whether to shift from RPL to RIL but whether to stay as the shareholders of RIL. To understand this, analyzing the volatility of the company is essential which has been done in the later part of the report.

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STOCK POSITION
The closing stock prices for RIL and RPL for the period o f two months starting from February 27, 2009, the date on which the announcement for the merger of the two companies was made till April 29, 2009, has been recorded to understand the movement of the share prices due to the announcement of the merger. On Friday, February 27, 2009, the announcement of the merger of RPL with RIL was announced. Following the announcement the shares of Reliance Industries dropped to an intraday low of Rs 1,213.20, down four per cent on the following Monday i.e. March 2, 2009, while RPL scrip also showed a fall of over eight per cent to an intra-day low of Rs 70 on the Bombay Stock Exchange. When the market closed on Monday, RIL was down by 3.15% to Rs 1,225.15 and RPL was lower by 1.38% at Rs 75.15. In 2002, when the first merger of RPL with RIL was announced, the share prices of RIL shares had dropped by 2.85% to Rs 312.95.

Close Price for RIL
2000 1800 1600 1400 1200 1000 800 600 400 200 0

Close Price

Figure 10: Stock Position of RIL Moreover, the share prices of RIL continued to fall further for the next few days as it had fallen in the following week of the merger announcement in 2002. Despite the fall in prices of the shares, analysts have termed the merger positive for RIL this time around. Another similarity that can be seen in both the mergers of 2009 and 2002 is that RIL has decided to cancel its
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shareholding in RPL as a part of the deal, which is resulting in a dilution of the promoter holding in the merged entity.

Close Price for RPL
120 100 80 60 40 20 Close Price

0

Figure 11: Stock Position of RPL The Board of Directors of Reliance Industries and its refinery subsidiary RPL on Monday, March2, 2009 approved the merger of the two firms, thus creating one of the world's largest oil refinery. They offered the shareholders of RPL one RIL share for every 16 shares held by them i.e., the swap ratio was decided to be 1:16. On Saturday, April 4, 2009, the shareholders and the creditors of Reliance Industries Limited approved the Scheme of Amalgamation of Reliance Petroleum Limited with RIL. It was a Court convened meeting of the equity shareholders, secured creditors and unsecured creditors of RIL. 98.86% of the shareholders present in person/proxies, representing 99.9998% of the total value of the equity shares held by them, voted in favor of the Scheme of Amalgamation. 100% of the Secured and Unsecured Creditors present in person/proxies voted in favor of the Scheme of Amalgamation.

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ANALYSTS TAKE ON THE MERGER OF RIL-RPL
The major points of the analysis given are summarized as under: CNBC TV 18 1 1. The swap ratio for the merger which is 1:16 would mean that there will be a dilution of 4.4% of fully diluted RIL equity. 2. The treasury stock which has been created due to merger will be extinguished which would be a positive step for Reliance. 3. The merger is believed to be an EPS accretive merger because the equity dilution will be only for 4.4% of RIL‟s expanded equity. But the expected contribution from RPL will be more and hence, it would be more accretive to the RI L‟s shareholders. 4. The merger is said to be tax neutral and after the merger both the entities will continue to enjoy the same tax benefits which they are currently enjoying. Therefore, on a consolidated basis, RIL will get the benefits of being an Export Oriented Unit and RPL will enjoy the SEZ benefits. 5. According to RIL, over the next 12-18 months, the demand for fuel would go down and therefore, the cost efficiency attained due to merger of the new refinery with the existing one will help the company to sell the product. 6. One of the main reasons for the merger of RIL-RPL is that since the two refineries are adjacent to each other, it would allow operational synergies for the Company. SANJIV AGRAWAL, E&Y2 1. The merger of RIL-RPL can be considered as a move in the right direction as it would help the merged entity to take advantage of the financial and operational synergies. 2. The company will get benefits of scale because of the integration and also it can prove beneficial in the bargaining of the crude prices given the level of complexity of the new refinery. The merger will give the company the operational flexibility.

1

CNBC TV 18: http://www.moneycontrol.com/ind ia/news/business/ril-rpl-merger-a-co mprehensive-cnbc-tv18analysis/387462 [Accessed on April 19] 2 E&Y, SANJEEV A GA RWA L: http://www.vccircle.co m/ 500/news/“the -merger-doubles-rils-cashflow-overnight” sanjiv-agrawal-ey [Accessed on April 21]

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3. It is expected that the cash flows would increase tremendously given the capacity of the new refinery along with the high Gross Refining Margin (GRM). 4. The shareholders of RIL will benefit in the long run as the new refinery merges with the existing one. DIMENSIONS CONSULTING3 Ajay Srivastava of Dimensions Consulting believes that the merger of RIL and RPL will be positive for RIL and the company would be benefitted from the increased cash flows. Moreover, a non-operating asset i.e., a 70% shareholding equivalent is becoming an operating asset for the company. THE FINANCIAL EXPRESS 4 1. Post merger, RIL‟s standalone balance sheet will show an increase by 13% as the sale of stake by Chevron will affect the balance sheet of the company marginally. 2. As told by ICICI Securities, the key reason for the merger cannot be attributed to the operational cost savings as believed by the company as the management of RIL has control over that of RPL and therefore, RIL managed operations of both the refineries. 3. Tax benefits won‟t increase post merger as both the companies have their own set of tax benefits. However, the huge amount of positive free cash flow from RPL of up to $1.4 billion would be utilized by RIL. BUSINESS STANDARD 1. RIL will benefit from the merger in the form of increased cash flows from RPL.
2.

The swap ratio of 1:16 has been in the favor of the shareholders of RPL. Moreover, the treasury stock created on account of merger will be cancelled which would mean a small dilution (4.4%) in the equity base which makes the merger earnings accretive.

3

DIM ENSIONS CONSULTING: http://www.moneycontrol.com/ india/news/market-outlook/ mergerrpl-positivefor-ril-d imensions-consulting/387374 [Accessed on April 20] 4 FINA NCIA L EXPRESS: http://www.financialexpress.com/news/rilrpl-merger-timing-a-surprise-foranalysts/430416/ [Accessed on April 16]

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3. The merger will be tax neutral for the merged entity which implies that the carry forward of unabsorbed depreciation cannot be set off against RIL‟s profits. 4. Due to the merger of the new refinery with a greater complexity and capacity, processing of cheaper and heavier crude oil is made easier which would lead to higher GRMs. DNA INDIA5 1. Analysts believe that the cash flows generated by RPL will help the capital expenditure plans of RIL as the former is better structured in terms of cash flows. 2. The merger would also increase RIL's operational synergies. Its cost efficiencies would help the company to optimize fiscal incentives, enhance financial strength and flexibility. It would also eliminate transfer pricing issues. 3. The deal would impart the company with much needed liquidity in the short term. 4. Since the revenues of RIL from refining are about two-third, the merger would double the capacity of the refinery making the revenues from the other business of RIL negligible. 5. Though the merger is unlikely to have any impact on the tax benefits available to RPL, RIL will be able to use the depreciation from the plant of RPL to lower the profits of the merged entity to save on tax. ANGEL BROKING6 1. Angel Broking believes that the RIL-RPL merger is likely to be Earnings accretive for RIL shareholders. FY2010 EPS is likely to be higher by 1.66% due to the merger. 2. It is expected by RIL that the merger will provide synergies in the procurement of crude and product placement. But the researchers believe that synergies might be low as the two companies share the facilities.
3.

As per the analysis, there will be a dilution of RIL‟s equity due to the RIL-RPL merger by 4.4% on account of issuance of 6.92 crore shares to RPL shareholders. This is so because RIL has decided to extinguish the treasury share that it had created on the account of the merger. The merger will dilute RIL promoters' effective stake by 2.3%.

5 6

DNA INDIA: http://www.dnaindia.co m/report.asp?newsid=1235366 [Accessed on April 15] ANGEL BROKINGS: http://www.business-standard.com/pdf/ril-rpl%20merger%20-impact%20analysis020309.pdf [Accessed on April 14]

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4. As per the analysis, the deal is a case of win-win situation for both RIL and RPL. This is because post merger, RIL will have improved Cash Flows and Balance Sheet along with a lower cost of capital. 5. For RPL, the merger is expected to reduce the volatility in Earnings which would allow the shareholders to participate in RIL‟s full energy value chain. BRICKS SECURITIES7 1. As per the firm‟s analysis, RIL-RPL merger ratio of 16:1 is in favor of RPL shareholders. BRICS intrinsic value estimates gave the swap ratio to be 21:1 based on the calculations done by their researchers for the valuations of the two companies. 2. Due to the merger, the company will be issuing 70 million shares to the shareholders of RPL which would increase the share capital of RIL to Rs. 16423 million. 212 million shares of RIL representing the treasury stock in lieu of its 75.4% stake (post Chevron stake purchase) will be extinguished. KHANDWALA SECURITIES8 1. The swap ratio recommended by the boards of RIL and RPL is 1:16. For this, RIL will be issuing 6.92 crore new shares which would in turn increase the equity share capital to Rs. 1643 crore. 2. Analysts believe that the merger is a strategic move made by the promoters of RIL mainly to enjoy economies of scale, capitalizing the cash flows of RPL and minimizing the cost of capital. 3. The downturn of the refining sector due to the global slowdown had increased the risks for RPL as a standalone unit. Therefore, due to the merger, the risk of the minority shareholders will be diversified.

7 8

BRICKS: http://www.business-standard.com/pdf/ril_ march_2.pdf [ Accessed on April 13] KHANDAWALA SECURITIES: http://www.valuenotes.com/ksl/ksl_ merger_03Mar09.asp?ArtCd=142668&Cat=E&Id= [Accessed on April 22]

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4. The cash generated by RPL, after the merger, can be deployed in exploration and retail business of the merged entity. Similarly, the short term requirements of funds for RPL can be fulfilled by the surplus cash in balance sheet of RIL. Hence, the cost of capital for the combined entity can be reduced. 5. The merged entity would not have any extra tax benefits and the benefits available to the two entities separately will hold good. 6. Merger can help RIL to improve the product slate and facilitate refining of various types of crude oil which would help the company to reduce cost and improve the refining margins. 7. The merger of RIL-RPL will help in unlocking the operational and financial synergies that exist between the two companies.

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VALUATION OF RIL AND RPL
VALUATION OF RIL Reliance Industries Limited, India‟s largest private sector conglomerate, reported an annual turnover of Rs 1, 33,443 Crores and net profit of 19,458.29 Crores in year 2007-2008. With 1453648601 outstanding shares, RIL has an EPS Rs 133.86. Earnings per Share serve as an indicator of a company's profitability. Higher the EPS, higher is the profitability of the company. Reliance Industries have maintained increasing earnings per share from last 5 years. In 20072008 it showed a 63% of increment from last year‟s 82.16. Thus, with the data of EPS, the growth of RIL looks promising. DPS: Dividend per Share is the amount that shareholder will receive for the each share they own. Dividend is distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. RIL has been continuously paying dividend to its share holders from last five years. The value of DPS has increased from 5.25 in 2003-04 to Rs 13 in 2007-08. As per my observations and understanding, there has been a change in calculating the DPS for the company since 2006-07. Since this year the DPS is calculated on total outstanding shares minus shares held by subsidiary companies on which no voting rights are exercisable and petroleum trust. Hence, total shares for calculating DPS are:

By doing so, the total amount of equity dividend is lowered and hence a lesser amount of tax has to be paid as dividend tax. Thus the total retained earnings of the company are increased at a particular Dividend per Share (DPS). OPERATING PROFIT PER SHARE: It is a measure of company's earning power from ongoing operations. This is equal to earnings before deduction of interest payments and income
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taxes. Operating profit is also called EBIT (earnings before interest and taxes) or operating income. Reliance Industries Limited has been showing a considerable growth in the operating profits. In 2007-08 it has shown a total growth of 13%, it has increased from 163.90 in 2006-7 to 185.74 in 2007-08.

Figure 12: Operating Profit per Share

Figure 13: Pe rcentage Growth

BOOK VALUE PER SHARE: It is the total value of the company's assets that shareholders would theoretically receive if a company were liquidated. It is also called the net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities. RIL has shown an increasing book value of the company for last 5 years. Thus is reduces the risk factor for the investors. Since the inception of the company, it has been trying to increase the net worth of the investors and in the process it has today become the second largest private sector conglomerate in the world. The Book Value per share has increased from 246.73 in 2003-04 to 649.12 in 2007-08, hence showing a growth of 163%.

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Figure 14: Book Value per Share PROFITABILITY RATIOS: Coming to the Profitability Ratios of the company, Reliance Industries has an operating margin of 17.47% in 2007-08. Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt.

For operating margin to increase, the difference between sales and cost has to increase. So, if a company is able to sell a given quantity at a higher price without a corresponding increase in expenses, margins are likely to expand. In 2007-08, sales of RIL increased by 19% and the expenses also rose by approximately 19%. Hence the operating margin of the company is pretty similar to its previous year performance. Thus the company has successfully maintained its operating margin over the years. Gross Profit Margin: It is a financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings. Firms that have a high gross profit margin are more liquid and thus have more cash flow to spend on research & development expenses, marketing or investing. Generally, investors

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avoid investing in firms that have a declining Gross Profit Margin over a time period, example over 5 years.

Looking into the Gross Profit Margin of RIL, we notice that the company has been able to increase its profit margin by a nominal value. Hence, the company seems to be a nice investment. The gross profit margin of RIL has improved from 12.74% to 13.83% in last five years.

Figure 15: Gross Profit Margin Net Profit Margin: Net Profit Margin tells exactly how the operations of a business are performing. Net Profit Margin compares the net income of a firm with total sales achieved. The formula for Net Profit Margin is:

If Gross Profit Margin of a company is very high when compared to Net Profit Margin of the company, this means that a huge amount of earnings is being allotted to marketing or administrative expenses. When we see the Net Profit Margin and Gross Profit Margin of the company, we realize that only a considerable amount of revenue is being used for administrative and marketing expenses. In 2006-07 the Gross Profit Margin and Net Profit Margin of the company were 10.69% and 13.64% respectively.

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Figure 16: Gross and Net Profit Margin

Return on Net Worth: It is also known as return on equity (ROE). It is an indicator of profitability and investors use ROE as a measure of how company is using its money.

RIL has shown a considerable stability in the RONW of the company. Thus, the company has been using the shareholders money efficiently. In 2007-08 the RONW of the company grew to 23.89% from previous years 18.67%.

Figure 17: Return on Net Worth

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LEVERAGE RATIOS Total debt to equity Ratio: The debt to equity ratio is used for measuring solvency of a company. It indicates how much the company is leveraged, in other words it measures the company‟s ability to borrow and repay the money. Debt to equity ratio is closely watched by creditors and investors because it reveals the extent to which company management is willing to fund its operations with debt. Lenders are particularly sensitive to this ratio as an excessive high ratio value will put their loans at risk of not being repaid. By using debt in the company finances, it is able to have interest and depreciation tax shield due to the tax paid on the debt interest. However no such tax benefit is achieved when fund raising is done through equity.

Ratios D/E Ratio

2008 0.45

2007 0.44

2006 0.44

2005 0.46

2004 0.61

Thus from the above table it is clear that RIL has maintained its debt to equity ratio around 0.45 over last 5 years. This means that neither the ratio is too high (risky for the lenders) nor it is too low (entitling the business to leverage and earn higher returns on equity).

Fixed Asset Turnove r Ratio: The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues.

Ratios Fixed assets turnover ratio

2008 1.28

2007 1.12

2006 0.96

2005 1.20

2004 0.97

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RIL has a very high fixed assets turnover ratio, thus the company has been efficiently using the fixed assets to generate its revenues.

LIQUIDITY RATIOS It is used to determine a company's ability to pay off its short-terms debts obligations. Higher the value of the ratio, larger is the margin of safety that the company possesses to cover shortterm debts. Curre nt Ratio: The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. While this shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing but it is definitely not a good sign. The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn its product into cash. Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations.

Ratios Current Ratio

2008 1.78

2007 1.61

2006 1.49

2005 1.66

2004 1.75

Reliance Industries Limited has a current ratio of 1.78, thus it can easily pay off its short term liabilities with its short term assets. This states that the company is in good financial health and it shows no signs of bankruptcy.

Quick Ratio: The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. Higher the quick ratio better is the position of the company.

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Inventory is excluded because some companies have difficulty turning their inventory into cash. In the event that short-term obligations need to be paid off immediately, there are situations in which the current ratio would overestimate a company's short-term financial strength.

Ratios Quick ratio

2008 0.99

2007 0.94

2006 0.86

2005 1.23

2004 1.19

The company has a decent quick ratio; this shows that company can repay almost all its current liabilities from its most liquid assets. This states a very fine financial health of the company. Inventory Turnover Ratio: Inventory turnover ratio states how many times a company‟s inventory is sold and replaced over a period of time. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying.

High inventory levels are unhealthy because they represent an investment with a rate of return of zero. It also opens the company up to trouble should prices begin to fall.

Ratios Inventory turnover ratio

2008 6.98

2007 8.97

2006 7.85

2005 8.91

2004 7.16

BPCL has the ratio of 11.64 while HPCL has the ratio of 9.47. Similarly, the ratio of MRPL and IOCL are 10.53 and 9.09 respectively. The competitor‟s inventory turnover ratio is more than that of RIL. This indicates that the ratio of RIL in comparison to its competitors is low. Reliance Industries Limited does not show a very high inventory turnover ratio; hence it does not deal with ineffective inventory buying problem. The company has very well managed its inventory level and reduces the risk in case of price fall.
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PAYOUT RATIOS

Dividend Payout Ratio: It is the fraction of net income a firm pays to its stockholders in dividends:

Reliance Industries Limited has been giving out 10-15% of its net income as dividend to its share holders. The payout ratio provides an idea of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio. Keeping this is mind we can say that Reliance has a dividend payout ratio on a little lower side. But if the company has plans of expansion or if it wants to invest the retained earning elsewhere, which is beneficial for the company, the low dividend payout ratios are justified.

Earning Retention Ratio: It is the percent of earnings credited to retained earnings. In other words, the proportion of net income that is not paid out as dividends forms the retention ratio.

Ratios Earning retention ratio

2008 91.62%

2007 88.73%

2006 84.63%

2005 86.20%

2004 85.73%

Reliance has been showing such high retention ratio because of its continuous expansion and investment plans.

COVERAGE RATIOS Financial Charges Coverage Ratio: It is a ratio that indicates a firm's ability to satisfy fixed financing expenses, such as interest and leases. Reliance Industries have been showing an ever increasing financial charge coverage ratio over the last five years. It has increased from 7.66 in 2003-04 to 26.86 in 2007-08. Thus the company has been able to very well cover the fixed expenses and hence making it a nice investment option, as these ratios suggest of a good financial health of the company.

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ESTIMATIONS FOR RIL The future financials for Reliance Industries are calculated by using percentage of sales method. The Percentage of Sales Method is a Financial Forecasting approach which is based on the premise that most Balance Sheet and Income Statement Accounts vary with sales. Therefore, the key driver of this method is the Sales Forecast and based upon this, Pro-Forma Financial Statements (i.e., forecasted) can be constructed and the firms needs for external financing can be identified. Thus the estimations have been made using following assumptions: 1) Year 2009 figures are not public. Hence the latest available figures are for 2007-2008. 2) Company would not be involved in any mergers or amalgamations. Hence the RPL – RIL merger has been overlooked by estimating the financial data for Reliance Industries Limited. 3) Sales in coming years are estimated by using following formula:

4) There has been no changes equity, secured loans, unsecured loans and investments of the company as there is no official declaration about it. 5) There is no occurrence of any unexpected circumstances leading to exceptional profit or loss to the company. 6) New revenues from Oil and Gas business from KGD6 fields are not considered for estimation.

Following figures have been generated by taking above states assumptions and by using percentage of sales method.

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Profit loss account
(Rs crore) Income: Sales Other Income Expenses: Material consumed Manufacturing expenses Personnel expenses Selling expenses Administrative expenses Depreciation Interest Cost of sales Operating profit Other recurring income Adjusted PBDIT Financial expenses Depreciation Adjusted PBT Tax charges Adjusted PAT Other non cash adjustments Reported net profit Earnings For appropriation( Pys) Equity dividend Dividend tax Retained earnings

Average (% of Sales)
1.00

Estimated Figures
Mar'10 Mar'09

214,174.52

169,056.37

70.24% 4.21% 1.50% 3.73% 2.03% 4.81% 1.59%

150,431.11 9,021.81 3,213.83 7,991.83 4,356.09 10,296.07 3,403.19 175,014.67 39,159.85 4,231.73 43,391.58 3,403.19 10,296.07 29,692.32 9,798.47 19,893.86 (19.04) 19,874.81 46,533.02 (3,058.60) (446.31) 50,037.93

118,741.19 7,121.27 2,536.80 6,308.27 3,438.44 8,127.10 2,686.27 138,145.96 30,910.41 3,340.27 34,250.68 2,686.27 8,127.10 23,437.32 3,893.92 19,543.39 (15.03) 19,528.36 23,891.65 (2,414.27) (352.29) 26,658.21

18.28% 1.98% 1.59% 4.81% 16.61% -0.01%

-1.43% 14.59%

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Balance sheet
(Rs crore) Sources of funds Owner's fund Equity share capital Reserves & surplus Loan funds Secured loans Unsecured loans Deferred Tax Liability Total Uses of funds Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital work-in-progress Investments Net current assets Current assets, loans & advances Less : current liabilities & provisions Total net current assets Total

Estimated Figures
Mar'10 Mar'09

INR 3,135.79 155,008.95 6,600.17 29,879.51 7,872.54 202,496.96 101,067.90 39,184.27 61,883.63 65,163.73 22,063.60 83,309.57 29,923.57 53,386.00 202,496.96

INR 3,135.79 104,971.02 6,600.17 29,879.51 7,872.54 152,459.03 101,067.90 39,184.27 61,883.63 37,659.17 22,063.60 48,145.94 17,293.31 30,852.63 152,459.03

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VALUATION OF RPL Reliance Petroleum Limited was set up to harness an emerging value creation opportunity in the global refining sector by Reliance Industries Limited (RIL), one of India's largest private sector company with a significant presence across the entire energy chain and a global leadership across key product segments.

With an annual crude processing capacity of 580,000 barrels per stream day (BPSD), RPL is the sixth largest refinery in the world. It has a complexity of 14.0, using the Nelson Complexity Index, ranking it amongst the highest in the sector. The polypropylene plant has a capacity to produce 0.9 million metric tonnes per annum. The refinery project is being implemented at a capital cost of Rs 27,000 crore being funded through a mix of equity and debt. Reliance Petroleum Limited (RPL) has recently commissioned SEZ refinery at Jamnagar and processed 3.6 million tonnes of crude during the quarter ended 31st March 2009. The unaudited financial results for the quarter / year ended 31st march 2009 revealed the 15 day production results. Based on that data, the valuation of RPL has been done.

Per Share Ratios:

Financial Ratios
Per share ratios EPS (Diluted) (Rs) Adjusted cash EPS (Rs) Dividend per share Operating profit per share (Rs) Book value (incl rev res) per share (Rs.) Net operating income per share (Rs)

Mar ' 09

0.19 0.44 0.50 30.07 8.17

The earnings per share, operating profit per share and net operating income per share are so low for RPL because for year 2008-09 the reported net profit is 84 crores and is based on only 15 days production period. Dividend per Share is NIL for the company as there has no dividend paid till date by RPL.
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Similarly for profitability ratios, the figures do not show the accurate financial health of the company, because the production has not been carried out for complete year leading to a nominal profit.

Financial Ratios
Profitability ratios Operating margin (%) Gross profit margin (%) Net profit margin (%) Adjusted return on net worth (%) Reported return on net worth (%) Return on long term funds (%)

Mar ' 09

6.17% 3.10% 2.28% 0.62% 0.62% 0.32%

Debt to Equity Ratio: The current debt to equity ratio for Reliance Petroleum Industries is 0.95. This means for every 1 Rupee of equity RPL has taken 0.95 Rupee of debt. Debt to equity ratio for Reliance Industries Limited (RIL) is 0.45. The difference between the D/E Ratio of two companies is because RPL is a new project and hence it requires huge investment for its machine. The debt raised from the market has not been paid off and hence forms a major portion of total funding. However, RIL had 0.45 D/E Ratio as it is an old company and has paid of major portion of its debt over the past years. Fixed Asset Turnove r Ratio: Being a new project, RPL has a very high value of Fixed Asset Turnover Ratio. For 2008-09 its value is 15.54. Curre nt Ratio and Quick Ratio: Current Ratio is a measure of the degree to which current assets cover current liabilities (Current Assets / Current Liabilities). A high ratio indicates a good probability the enterprise can retire current debts. However, the quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. Higher the quick ratio better is the position of the company.

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Quick Ratio draws a more realistic picture of a company's ability to repay current obligations than the current ratio as it excludes inventories that may hardly be liquidated at their book value. RPL shows a big difference in the values of current and quick ratios. The value of current ratio comes out to 2.51 whereas quick ratio is only 0.51. This is because of the huge inventory that the company holds. The inventory (Stores, Chemicals and Catalysts) are approximately worth 748 crores.

ESTIMATIONS FOR RPL The future financials for Reliance Petroleum are calculated by using percentage of sales method, the same way it has been done for RIL. The data of 15 days of production, which was published on 23rd April 2009, has been extrapolated to show a year production. The factors which have been taken into consideration are growth rate depending upon the GDP (Gross Domestic Product) growth rate of India and working capacity of the refinery which keeps on increasing per year till it reaches the maximum. The current working capacity of the Reliance Petroleum‟s Jamnagar refinery is 40%. It can be explained as follows: Particulars Current production Actual Capacity Capacity Utilization Per Day Yearly Production Production 240000 580000 0.4137931 87600000 211700000 0.4137931

The current production is 240000 barrels per day but the actual capacity is 580000 barrels per day. By dividing the two figures, we can get the capacity utilization for RPL for 15 days production. The figure is coming out to be approx 40%. This means it was operating of 40% capacity of its installed capacity. We assume that the working capacity will keep on increasing in the coming year and will be 70%, 85% and 100%

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in 2009-10, 2010-2011 and 2011-12 respectively. The GDP growth has been assumed to be 6%, 8% and 10% for the coming three years.

Assumptions made for making an estimation of the financial figures of RPL: 1) The 15 day production data has been extrapolated to make a year‟s data. 2) The growth of RPL sales depends on the working capacity of the refinery and the GDP of the country. 3) The GDP growth rate is assumed to be 6%, 8% and 10% in the coming years. Similarly the working capacity increases to 70%, 85% and 100%. 4) Percentage of Sales method has been used to estimate the future figures. Thus the percentage of sales of all the expenses and incomes will remain same in the coming years. 5) There is no merger planned for the company. 6) There has been no changes equity, secured loans, unsecured loans and investments of the company as there is no official declaration about it. 7) There is no occurrence of any unexpected circumstances leading to exceptional profit or loss to the company.

Profit loss account
(Rs crore) Growth Rate (Assumption) Installed Capacity Working Capacity Income: Sales Other Income Expenses: Material consumed Personnel expenses Selling expenses

Average Percentage of Sales (%)

Actual Figures
IV Q Mar ' 09

Estimated Figures
Mar ' 10 6% Mar ' 11 8% 100% 85% 218,352.50 217,721.78 630.72 214,110.85 173,502.60 947.13 19,392.51 Mar ' 12 10% 100% 100% 282,451.40 281,757.60 693.79 277,084.63 224,532.77 1,225.70 25,096.19 119

100% 40% 3,702.00 1.00 3,678.00 24.00 3,617.00 79.69% 0.44% 8.91% 2,931.00 16.00 327.60

100% 70% 166,602.79 166,018.79 584.00 163,265.35 132,300.46 722.21 14,787.32

Administrative expenses Depreciation Interest Cost of sales Operating profit Other recurring income Adjusted PBDIT Financial expenses Depreciation Adjusted PBT Provision for Current Tax Adjusted PAT Reported net profit Earnings For appropriation( Pys) Transfer To Reserve Retained earnings

4.80% 3.07% 1.44%

176.40 113.00 53.00 3,451.00

7,962.40 5,100.63 2,392.33 155,772.39 10,246.40 584.00 10,830.40 2,392.33 5,100.63 3,337.44 39.26 3,298.17 3,298.17 84.00 3,298.17 3,382.17

10,442.12 6,689.11 3,137.37 204,284.36 13,437.42 630.72 14,068.14 3,137.37 6,689.11 4,241.66 49.90 4,191.76 4,191.76 3,298.17 4,191.76 7,489.93

13,513.33 8,656.50 4,060.13 264,368.00 17,389.61 693.79 18,083.40 4,060.13 8,656.50 5,366.77 63.14 5,303.63 5,303.63 4,191.76 5,303.63 9,495.39

6.17% 0.39% 1.44% 3.07% 1.18%

227.00 24.00 251.00 53.00 113.00 85.00 1.00 84.00 84.00 84.00 84.00

Balance sheet
(Rs crore) Sources of funds Owner's fund Equity share capital Reserves & surplus Loan funds Secured loans Deferred Tax Liability Total Uses of funds Fixed assets Gross block Less : revaluation reserve Less : accumulated depreciation Net block Capital work-in-progress Investments Net current assets Current assets, loans & advances Mar'10

Estimated Figures
Mar'09

4499.986875 12,415.13 12,827.53 29742.65 212.48 28.51 183.97 26,473.87 2,438.32 1,074.50

4499.986875 9,032.96 12,827.53 26360.4762 212.48 28.51 183.97 23,172.32 2,438.32 940.50

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Less : current liabilities & provisions Total net current assets Total

428.01 646.49 29742.65

374.63 565.87 26360.4762

STUDY OF STOCK PRICES OF RIL AND RPL

To understand the stability of the stock prices of Reliance Industries Limited, a study of stock prices of the company was done by using last one year‟s data. Percentage standard deviation was calculated by using following formula:

Where, RL = percentage change in share price on daily basis, determining the change in return Rf = Risk-Free Rate of 364 day T-bills as on 13/04/2009 (%) = 4.4

Variance is calculated through:

Where N is the total number of days of which the data has been considered.

Annual Returns of a stock are calculated by using the formula:

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By using the above formulas, Deviation in the stock prices of Reliance is 3.3523 and the deviation for RPL is 3.0302. This shows that RPL‟s stock show more stability when compared to Relia nce Industries Limited‟s stocks.

Particulars Annual Returns (%) Standard Deviation (%) Variance (%)

RIL -26.21 3.35 11.19

RPL -34.81 3.03 9.15

S&P CNX Nifty Index -28.75 2.62 6.85

Annual Returns percentage is negative because the prices of the companies and the Nifty index were higher on 1 April 2008 when compared to the current indexes. This is because of the current slow down or economic recession as it may be called.

If we observe the Annual Returns for Nifty Index, we see that it has gone down by 28.75 however the RPL stock‟s annual return has gone down up to 34.81%. Thus, RPL has shown more loss when compared to the Nifty Index. RIL stock‟s annual returns have gone down by only 26.21%, this value is better than that of Nifty Index. Hence even after the economic slowdown, RIL has managed to show better results.

However when we talk about the standard deviation and the variance in the prices of the stock market of the two companies and the Nifty Indexes, we can say that standard deviation and variance of RIL is more when compared to RPL and Nifty. Thus RPL proves to be a more stable stock when compared to RIL. Similarly, the variance of RIL is very high as compared to that of Nifty.

Particulars Covariance Correlation Coefficient Volatility (β)

RIL 3.68 0.42 0.54

RPL 3.29 0.41 0.48

Covariance , in probability theory and statistics, is a measure of how much two variables change together. In finance, it is a measure of the degree to which returns on two risky assets
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move in tandem. If two variables tend to vary together (that is, when one of them is above its expected value, then the other variable tends to be above its expected value too), then the covariance between the two variables will be positive. On the other hand, if one of them tends to be above its expected value when the other variable is below its expected value, then the covariance between the two variables will be negative.

So when we calculate the covariance of RIL with stock market, we see that the value comes out to be positive. Same is the case for RPL. But looking the value of covariance we realize that RIL has been more correlated to stock market when compared to RPL. Hence, the stock prices of RIL very closely follow the stock market indexes. Thus the changes in the RIL stock prices are very much governed by the broader factors like economic condition and political scenarios.

Correlation coefficient is a measure that determines the degree to which two variable's movements are associated. The correlation coefficient will vary from -1 to +1. A -1 indicates perfect negative correlation, and +1 indicates perfect positive correlation. Following formula is used for calculating the correlation coefficient:

If we see the values of correlation coefficient we can say that the values for RIL and RPL are approximately the same. This means, both the stock prices vary in association with the variance of Nifty Index. But strictly speaking, the association of RIL stock prices is higher with Nifty Index when compared to RPL‟s.

Volatility is a statistical measure of the dispersion of returns for a given security or market index. It is normally denoted by β (beta). It refers to the amount of uncertainty or risk about the size of changes in a security's value. A higher volatility means that a security's value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. A lower

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volatility means that a security's value does not fluctuate dramatically, but changes in value at a steady pace over a period of time. When we compare RIL stock‟s volatility with RPL stock‟s volatility, we understand that Reliance Industries Limited has higher volatility. This means RIL stocks have higher risk of changing value over a short period of time. Thus, RIL stocks are more volatile then RPL share prices.

Observation: Higher returns are accompanied by high risks. RPL and RIL stocks very well justify the statement. RIL has less stable stock as compared to RPL and hence are riskier. But at the same time the returns of RIL stocks are better when compared to RPL stocks.

WEIGHTED AVERAGE COST OF CAPITAL (WACC)

It is the rate that a company is expected to pay to finance its assets. It is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation. The WACC of a firm increases as the beta and rate of return on equity increases. With an increase in WACC decrease in valuation takes place and a higher risk is noticed.

Now, for the valuation of the company let us find out the WACC for RPL and RIL and then compare the results.

The cost of capital can be calculated by using the following formula:

Where, Kc = Cost of capital We = Weight of equity
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Ke = Cost of equity Wd = weight of debt Kd = Cost of debt Now, further calculations are done using below stated formulas:

The cost of debt comes out to be 4.55 for RIL and 5.96 for RPL. The financial charges mentioned in the quarterly report of RPL are only 53 crore rupees. But the one mentioned in the RPL‟s balance sheet is 774.213252 crores, so the calculations are made on that statistics. Thus we can see that cost of debt for RIL is lesser when compared to RPL.

The cost of equity is 17.48 for RIL and 16.10 for RPL. Here Rf is the risk free rate, which is rate of 364 day T-bills as on 13/04/2009, i.e. 4.4%. Rm is market return, which comes out to be 28.75 for the considered period. The value of β for RPL is 0.48 and for RIL it is 0.54.

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WACC For RIL
Beta(β) Risk free rate (Rf) Market return (Km) Risk Premium Required Rate of Return (Cost of Equity) Cost of Debt Tax Rate After Tax Cost of Debt Total Debt Shareholders' Equity Total capital WACC 0.54 4.40 28.75 24.35 17.48
(in percent) (in percent) (in percent) (in percent)

WACC For RPL
Beta(β) Risk free rate (Rf) Market return (Km) Risk Premium Required Rate of Return (Cost of Equity) Cost of Debt Tax Rate After Tax Cost of Debt Total Debt Shareholders' Equity Total capital WACC 0.48 4.40 (in percent) 28.75 (in percent) 24.35 (in percent) 16.10 (in percent) 6.04 (in percent) 1.18 (in percent) 5.96 (in percent) 49% (in percent) 51% (in percent) 100% (in percent) 11.15 (in percent)

5.38 (in percent) 15.44 (in percent) 4.55 (in percent) 29% (in percent) 65% (in percent) 94% (in percent) 13.48 (in percent)

From this we can say, that WACC for RIL is higher than that of RPL. This shows that RIL is a riskier firm to invest when compared to RPL. This is majorly due to the equity percentage in RIL. Reliance Industries uses almost 65% of equity, as equity is costlier than debt, WACC for RIL is higher for the company.

As the WACC for RIL is 13.48%, this means that only those investments should be made that give a return higher than the WACC of 13.48%. Similar ways RPL should invest only in investments which pays higher returns than 11.15%. Thus, because of the higher portion of equity in capital structure, WACC of RIL is higher than RPL‟s WACC.

After the calculation of WACC, calculations for FCFE and FCFF were done to analyze the financial position of the two companies. These are discussed in detail as under:

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FREE CASH FLOW TO EQUITY

Free Cash Flow to Equity (FCFE) means a measure of how much amount of cash can be paid to the equity shareholders of the company after the payment of all the expenses, reinvestment and debt repayment.

It is calculated as:

FCFE is many a times used by analysts to determine the value of a company. In the valuation of RIL, the two stage FCFE model has been used. According to this model, the value of a stock is the present value of the FCFE per year for the extraordinary growth period plus the present value of the terminal price at the end of the period. It can be written as:

Where,

FCFE (t) = Free Cash flow to Equity in year t Pn = Price at the end of the extraordinary growth period r = required rate of return to equity investors in the firm The terminal price is generally calculated using the infinite growth rate model,

Where, gn = Growth rate after the terminal year forever. In the case of RIL for the current period:
Current Earnings per share= (Capital Spending - Depreciation)*(1-DR) Change in Working Capital * (1-DR) Current FCFE 133.86 1.2 59.87 75.19

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And in the case of RPL,
Current Earnings per share= (Capital Spending - Depreciation)*(1-DR) Change in Working Capital * (1-DR) Current FCFE 0.19 -0.14 1.4 -1.06

It has been assumed that the growth rate would be 9% for all the periods for which the calculation has been shown. Moreover, it has also been assumed that the beta (β) for the company will be stable for the period i.e., it would not change. The working capital as a percent of the revenues is 14% for RIL and 15% for RPL. The return on equity in the stable growth period is 17.48% for RIL and 16.10% for RPL. The depreciation/amortization is added back to the cash flows because free cash flow is meant to measure money being spent right now and the not transactions that happened in the past. This makes FCFE a useful instrument for identifying growing companies with high up-front costs, which may eat into earnings now but have the potential to pay off later. Through FCFE we can find out the total amount that the co mpany could have paid in the previous years. The Free Cash flow to Equity (FCFE) is a measure of how much cash is left in the business after non-equity holders (debt and preference shareholder) have been paid, and after any reinvestment needed to sustain t he firm‟s assets and future growth. If FCFE>Dividends, this means that company is paying too less to its shareholders. But when FCFE<Dividends then company is paying too much to its shareholders. In case of RIL, the dividend per share for the current period is 13. From the above given figures, it can be seen that the dividend paid by the company is less than FCFE. Hence management is in pressure to pay more to its shareholders. But it is also because the company has invested the earnings for the expansion and further investments which help the company to increase the shareholders wealth in the long run. The future plans of action for the company are: 1. Basic studies of new material development in Hazira. 2. Treatment of plant waste water streams for re-use.
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3. Development of nano metal/metal oxides composites of polyolefin. 4. High shrinkage fiber development in Dhenkanal. 5. Nano structured catalysts for hydrogenation and dehydrogenation processes in Vadodara. 6. Nano structured adsorbents for purification and recovery of monometers. 7. Installation of SSM air texturing pilot machine in Silvassa. 8. PFF silicon finish oil consumption to be reduced by 0.5 Kg/MT in Hoshiarpur. In the case of RPL, the company has not been paying any dividends because RPL is yet to fully commission its refinery and generate the revenues which can be distributed to the shareholders. Though the figure for the FCFE is negative, it does not mean that financially the company is not sound. It is negative because the company has only recently started production (only 15 days of production till March 2008). The estimations for both the companies can give a better view about the future of the company. The estimations for the next four years for RIL are:
Particulars Earnings - (Cap Ex-Depreciation)*(1-DR) -Chg. Working Capital*(1-DR) Free Cash flow to Equity Present Value 1 169.97 1.2 0 171.17 145.71 2 215.83 1.2 0 217.03 157.26 3 274.06 1.2 0 275.26 169.77 4 348 1.2 0 349.2 183.33 Terminal Year 481.66 2.48 0 479.18

The estimations for the next 3 years for RPL are as follows (these figures are only 15 days figures):
Particulars Earnings - (Cap Ex-Depreciation)*(1-DR) -Chg. Working Capital*(1-DR) Free Cash flow to Equity Present Value 1 0.19 -0.14 0 0.34 0.29 2 0.2 -0.14 0 0.35 0.26 3 0.21 -0.14 0 0.36 0.23 Terminal Year 0.23 0 0 0.23

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FREE CASH FLOW TO THE FIRM Free cash flow for the firm (FCFF) is a measure of a company's profits after it has laid out money for all expenses and reinvestments. FCFF means a measure of financial performance that expresses the net amount of cash that is generated for the firm, consisting of expenses, taxes and changes in net working capital and investments. It is calculated as:

This is a measurement of a company's profitability after all expenses and reinvestments. It's one of the many benchmarks used to compare and analyze financial health. It is one of the most important criteria to check the financial condition of a company. A positive value would indicate that the firm has cash left after expenses. A negative value, on the other hand, would indicate that the firm has not generated enough revenue to cover its costs and investment activities. It indicates bad financial health of the company. In the valuation of RIL, the two stage FCFE model has been used and t his model is designed to value the equity in a firm, with two stages of growth, an initial period of higher growth and a subsequent period of stable growth. In case of RIL,
Current EBIT * (1 - tax rate) = - (Capital Spending - Depreciation) - Change in Working Capital Current FCFF 24468.28 150.81 7512.8 17106.29

And in case of RPL:
Current EBIT * (1 - tax rate) = - (Capital Spending - Depreciation) - Change in Working Capital Current FCFF 248.05 -64.77 627.82 -315.01

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It has been assumed that the growth rate would be 9% for all the periods for which the calculation has been shown. Moreover, it has also been assumed that the beta (β) for the company will be stable for the period i.e., it would not change. The working capital as a percent of the revenues is 14% for RIL and 15% for RPL. The return on equity in the stable growth period is 17.48% for RIL and 16.10% for RPL. The shareholders generally don‟t prefer negative cash flows for the company in any year until they get good returns. Negative cash flow does not necessarily mean loss, and it may be due only to a mismatch of expenditure and income. Having positive FCFF implies that the company has free cash flows, which is good news for the investors. Therefore, before investing in any company, the investors should also have a look at the FCFF of the company. The value of FCFF for RIL is positive, which implies that company has a sound financial health. In case of RP L, the value is negative but it does not imply that the company‟s financial health is low. It is negative because the company has only recently started production (only 15 days of production till March 2008). The estimations for the future can give a better picture of the company‟s financial position. The estimations for the next 4 years are given as under:
Particulars EBIT * (1 - tax rate) - (Cap Ex-Depreciation) -Chg. Working Capital Free Cash flow to Firm Present Value 1 28,391.43 -174.99 3121.97 25544.45 2250.32 2 32943.59 -203.05 3506.50 29640.14 23017.09 3 38225.62 -235.60 4068.72 34392.51 23535.28 4 44354.56 -273.38 4721.08 39906.86 24065.12 Terminal Year 56098.14 -11112.98 0 67211.12

Similarly, the estimations for RPL for the 4 years are as follows (these figures are only 15 days figures):
Particulars EBIT * (1 - tax rate) - (Cap Ex-Depreciation) -Chg. Working Capital Free Cash flow to Firm Present Value (Rs. In Crores) 1 258.47 -67.49 23.68 302.27 272.24 2 269.32 -70.32 24.68 314.96 255.49 3 280.63 -73.27 25.71 328.19 239.77 4 292.42 -76.35 26.79 341.98 225.02 Terminal Year 332.12 -151.3 0 483.42

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FINDINGS
1. The financial ratios of RIL reveal a good financial health of the company, as the company has an increasing book value in last five years. The company has strong payout and liquidity ratios. 2. The stocks of RPL are more stable when compared to RIL. Thus, the volatility of RPL stock (0.48) is lesser than RIL‟s stock (0.54) 3. Weighted average cost of capital (WACC) of Reliance Industries Limited (13.48%) is more than Reliance Petroleum Limited (11.15%). This is because RPL is better leveraged than RIL. 4. In case of RIL, the dividend paid by the company is less than FCFE but it is so because the company has invested the earnings for the expansion and further investments which help the company to increase the shareholders wealth in the long run. While in the case of RPL, the company has not been paying any dividends because it has not yet become due to the investors. 5. The positive value of FCFF for RIL implies that company has a sound financial health. In case of RPL, the value is negative because the company has only recently started production (only 15 days of production till March 2009).

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CONCLUSION
The capital cost of RPL‟s project was estimated at Rs. 270 billion. The project was funded through debt (Rs. 157.5 billion) and equity (Rs 112.5 billion). RPL went for an Initial Public Offer (IPO) through the book building process and it fulfilled certain guidelines issued by SEBI called Disclosure and Investor Protection Guidelines (DIP) and to raise funds through debt, guidelines of the Reserve Bank of India for External Commercial Borrowings were complied with. Also software using the functions of Microsoft Excel 2007 called the Portfolio Tracker was created which helps in calculating the gain or loss on the stocks of a portfolio. By analyzing the merger of RPL with RIL, it can be concluded that the swap ratio for the merger which is 1:16 would mean that there will be a dilution of 4.4% of fully diluted RIL equity is in favor of the shareholders of RPL.

The deal is believed to be a win-win situation for the shareholders of both the companies. This can be attributed to the fact that post merger RIL will have improved Cash Flows and Balance Sheet along with a lower cost of capital. Moreover, the merger will help in unlocking the operational and financial synergies that exist between the two companies.

The financial ratios and free cash flows of RIL state that the company is in good financial health. RPL has started its operation on 15th March, 2009. Hence only 15 days operational data has been made public. Currently the company has been highly leveraged as D/E Ratio for the company is 0.95:1 because RPL is a new project and requires heavy machinery.

The weighted average cost of capital (WACC) for RIL is higher than RPL and hence the valuation of RPL is better when compared to RIL (in respect of WACC).

But considering the fact that RPL is a new project and the estimations of the company statistics may show high variations from the actual results, RIL seems to be a good investment option. This is because the Reliance Industries Limited has managed to be a profit generating company
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since last 30 years. Thus, past data suggests that though RPL is a relatively stable stock option for investme nt, RIL‟s past data promises to increase the shareholders wealth.

We can also conclude that buying the shares of RIL will yield better results for the shareholders even though RIL stocks are more volatile as compared to the shares of RPL. This is because the former has a record of sustained earnings since its inception.

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RECOMENDATIOS
Based on the study, it can be said that the RPL shareholders would benefit in the long term from the merger with RIL and the stakeholders should not exit the market by selling their shares of RPL. This is because after the merger, RPL shareholders will be gaining from the upsides from RIL‟s petroleum business as the company will be gaining from the strong value accretion due to exploration of the large unexplored acreage in the highly prospective areas. Also, a steady rise in RIL‟s earnings is more likely than in RPL‟s earnings. There has been a secular rise in RIL‟s earnings since its inception. Because there are a number of subsidiary companies under the group, any decline in earnings of one subsidiary is set off against the increase in the earnings of the other subsidiaries. Moreover the downturn of the refining sector post global slowdown has increased risks for RPL as a standalone unit. Therefore, the merger with RIL would expose RPL shareholders towards a relatively stable exploration business, integrated refining and petro-chemical business and emerging retail business. The swap ratio of 1:16 will put the RPL shareholders in the same position after the merger as the shareholders of RIL as they are in now. Thus, we can say that the merger will benefit t he shareholders in the both the long and the short run.

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DECLARATION
The reports and notes on merger and valuation of the company is completely my work and it is as per my understanding. Same are not vetted or authorized by the Company.

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REFERENCES
FROM PRINT MATERIAL 1. IM Pandey, 2008, Financial Management, Vikas Publishing House, 9th Edition, pp.432434 2. IM Pandey, 2008, Financial Management, Vikas Publishing House, 9th Edition, pp.438440 3. Taxman‟s SEBI Manual, Volume I, 12th Edition, June 2008

FROM WEB PAGES AND ONLINE BOOKS 1. www.bseindia.com 2. www.nseindia.com 3. www.wikipedia.com 4. www.investopedia.com 5. www.investorwords.com 6. www.ril.com 7. www.reliancepetroleum.com 8. http://en.wikipedia.org/wiki/IPO [Accessed on 8 March 2009] 9. http://www.bseindia.com/bookbuilding/about.asp [Accessed on 8 March 2009] 10. Morgan Stanley, “Strategy Chart book January 5, 2007” [online] retrieved from : http://d.scribd.com/docs/jvxdvo8wvndwl0jl1w6.pdf [Accessed on 15 March 2008] 11. http://www.financeweek.co.uk/item/5608 [Accessed on 18 March 2009] 12. http://www.investopedia.com/terms/a/arbitrage.asp [Accessed on 25 March 2009] 13. http://www.ril.com/html/aboutus/aboutus.html [Accessed on 27 March 2009] 14. http://www.rbi.org.in/scripts/ECBView.aspx [Accessed on 27 March 2009] 15. http://finmin.nic.in/the_ministry/dept_eco_affairs/budget/annual_report/9900ea5.PDF [Accessed on 27 March 2009] 16. http://www.dare.co.in/funding/banks- loans/complete- guide-to-debt- financing.htm [Accessed on 1 April 2009] 17. http://entrepreneurs.about.com/od/financing/a/debtfinancing.htm [Accessed on 1 April 2009]
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18. http://finance.mapsofworld.com/finance-theory/term- financing/ [Accessed on 2 April 2009] 19. http://wiki.answers.com/Q/Long_Term_Sources_of_Finance_in_financial_management [Accessed on 2 April 2009] 20. http://www.nos.org/srsec319/319-19.pdf [Accessed on 2 April 2009] 21. http://www.businesslink.gov.uk/bdotg/action/detail?type=RESOURCES&itemId=107378 9573 [Accessed on 3 April 2009] 22. http://www.investorglossary.com/equity.htm [Accessed on 3 April 2009] 23. http://en.wikipedia.org/wiki/Capital_market [Accessed on 4 April 2009] 24. http://www.businessdictionary.com/definition/capital- market.html [Accessed on 4 April 2009] 25. http://www.karvy.com/corporatefin/mbdhome.htm [Accessed on 5 April 2008] 26. http://www.investopedia.com/terms/u/underwriter.asp [Accessed on 5 April 2008] 27. http://www.sebi.gov.in/acts/act041.pdf [Accessed on 5 April 2008] 28. http://www.investopedia.com/terms/s/stockbroker.asp [Accessed on 5 April 2008] 29. http://www.corporateinformation.com/Company-Snapshot.aspx?cusip=C3561HB00 [Accessed on 10 April 2009] 30. http://money.rediff.com/ [Accessed on April 23 till April 29] 31. http://www.valuenotes.com/vnteam/vn_poll_10Mar09.asp?ArtCd=142852&Cat=C&Id=3 5 [Accessed on May 4] 32. http://www.scribd.com/doc/924997/Rilrpl-Merril- Lynch [Accessed on May 4] 33. http://www.zeenews.com/Business/Companies-Commodities/2009-0302/511871news.html [Accessed on May 5] 34. http://www.worldenergysource.com/articles/pdf/longwell_WE_v5n3.pdf [Accessed on May 5] 35. http://www.moneycontrol.com/india/news/business/rpl- merger-to-unlock-synergiescrudesourcing-ril/387348 [Accessed on May 6] 36. http://www.hinduonnet.com/thehindu/holnus/006200903021937.htm [Accessed on May 6] 37. http://www.hinduonnet.com/businessline/blnus/02271910.htm [Accessed on May 7]

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38. http://www.indianstocksnews.com/2009/02/ril- rpl- merger-what-should- investors-do.html [Accessed on May 7] 39. http://www.thehindubusinessline.com/iw/2009/03/01/stories/2009030151040700.htm [Accessed on May 8] 40. http://www.financialexpress.com/news/RILRPL- merger-gets-shareholders- nod/444294/ [Accessed on May 8] 41. http://www.zenwealth.com/BusinessFinanceOnline/FF/PercentageOfSales.html [Accessed on May 8] 42. http://www1.economictimes.indiatimes.com/articleshow/4210317.cms [Accessed on May 11] 43. http://economictimes.indiatimes.com/RIL-RPL-Merger-Fate-of-treasury-stockuncertain/articleshow/4203064.cms [Accessed on May 11] 44. http://economictimes.indiatimes.com/rssarticleshow/4211288.cms [Accessed on May 11]

FROM LEGAL MATERIALS 1. Reliance Petroleum Limited Prospectus April 28, 2006. S.I. 2006 2. GOVERNMENT OF INDIA. August 2005. Guidelines on External Commercial Borrowings Policies & Procedure. GOI Ministry of Finance. S.I. 2005 3. RELIANCE PETROLEUM LIMITED. 2007 -08. Annual Report. S.I. 2008 4. RELIANCE INDUSTRIES LIMITED. 2007-08. Annual Report. S.I. 2008 5. Other Internal Documents of the Company referred.

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