Reliance Industries Limited (RELIANCE NSE|BSE) :: Net-debt free, but still non-compliant due to debt ratio failure?

Reliance Industries Limited (RELIANCE NSE|BSE) :: Net-debt free, but still non-compliant due to debt ratio failure?

Why is Reliance Industries Limited still non-compliant on Islamicly due to high debt ratio? Hasn’t the company just declared that it is net debt free? How often is review of stocks conducted on Islamicly?

Let’s explore answers to the above curious questions.

Reliance Industries raising huge investments

Jio platforms, which are owned by Reliance Industries Limited has been in the news lately for raising astronomical amounts of investments from marquee global tech investors such as Facebook Inc, Silver Lake, Vista Equity Partners, General Atlantic, KKR, Abu Dhabi-based sovereign investor Mubadala, Abu Dhabi Investment Authority, as well as from Saudi Arabia’s Public Investment Fund (PIF), one of the world’s largest sovereign wealth funds.

Reliance industries has so far raised INR 115,694 crore through stake sales in Jio Platforms. Additionally, they have raised INR 53,124.20 crore through a rights sale.

That brings its total funds raised in the past 2 months to be about INR 168,818 crore. Reliance Industries CMD, Mukesh Ambani, said in a statement on 19th June 2020, “I have fulfilled my promise to the shareholders by making Reliance net debt-free much before our original schedule of 31st March 2021”.

So, is Reliance Industries indeed debt free?

As per the latest financials disclosed by the company for the period 31st March 2020, the company’s interest bearing debt is INR 317,303 crores (as calculated by Islamicly research). Further, the company has Cash and Cash equivalents of INR 103,835 crores.
If we compare the funds raised + the cash balances and other accruals against the debt numbers, Reliance Industries Limited seems to be near ‘net-debt’ free.

So, does this affect the Shariah compliance of Reliance Industries?

One of the screens for assessing compliance of listed companies is measuring its debt to market capitalization ratio. The Shariah criteria says:

Interest bearing debt/ 36 months average market capitalization < 33%

It is interesting to note that the Shariah compliance criteria uses ‘interest bearing debt’ and not ‘net-debt’. Hence, being net-debt free isn’t a material factor for assessing Shariah compliance of companies.

Being debt free means Shariah compliant?

In the current financial world, access to Islamic debt or interest free debt is limited. Almost all companies using leverage would be doing so using interest bearing debt. Muslim investors tend to search for ‘debt free’ companies to invest, with the assumption that if the company is debt free - it wouldn’t be involved in an interest bearing activity hence being permissible for investment by Muslim investors. Unfortunately, this assumption is incorrect.

Shariah compliance criteria allows for tolerance of interest bearing debt and cash balance of the company. Read the full Shariah criteria here: Shariah Screening Criteria

Sources of reliable Shariah compliance information

For assessing any listed company, preference has to be given to published financial statements over any other statement by the company management. For assessing the compliance of Reliance Industries Limited as well, we will have to rely on the latest published financial statement of the company.
One of the primary reasons for this is to ensure standardization of data input as well as authentication of data. Both these practices lend credibility to the Shariah screening process.

How often does data gets updated on Islamicly?
Islamicly reviews Shariah compliance status of all companies on a daily basis. The daily updates check for the latest available financial numbers are well as the latest market prices and assess the Shariah compliance. Hence, rest be assured that compliance status available on Islamicly platforms (app or desktop) is upto date.

Shariah compliance status of Reliance Industries.

As per the latest financials disclosed by the company for the period 31st March 2020, the company’s debt is INR 317,303 crores. The company’s 36 month average market capitalization as on 19th June 2020 is INR 732,075 crores.
That makes the debt ratio to be 43%. Since the debt levels breach the Shariah threshold of 33%, Reliance Industries Limited is non-compliant and hence investment in Reliance Industries Limited cannot be made by Shariah sensitive investors.

(screen grab from Islamicly desktop portal as on 19th June 2020)

Will Reliance Industries become Shariah compliant in the next quarter?

Given the new pieces of information, it has to be seen in the next financial statements, how Reliance Industries Limited discloses the status of the funding raised, the debt levels as well as the cash levels. It will be interesting to see how the new fund raise affects the cash and cash equivalent position of the company too.

If Reliance does not deploy the cash raised by paying off the debt or invests it otherwise, but rather keeps it as cash balances, it is likely to fail the cash compliance threshold as well. The exiting cash balance + new funding raised will breach the cash compliance threshold of 33%!

It will be prudent to wait for the compliance status of Reliance Industries Limited to change on Islamicly before investing.

Hence, the statement of Reliance CMD regarding the company becoming ‘net-debt’ free has no consequence on the Shariah compliance status of Reliance Industries Limited. Furthermore, it is emphasized that Shariah screening does not get impacted based on interim news reports. Although congnisance of such events are taken, the actual compliance assessment depends on the financial reports released by the company.

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