Reliance won’t have it easy going zero-debt

Mumbai: Six months after Mukesh Ambani laid out a road map to make Reliance Industries Ltd. free of net debt by early 2021, his plan has hit a few bumps thanks to the government.

Prime Minister Narendra Modi’s administration has petitioned a court to halt a proposed stake sale by Reliance Industries to Saudi Arabian Oil Co., threatening a key source of funds needed to pare liabilities. In addition, the conglomerate, which is into oil refining, telecommunications and retail, is also facing unfriendly tax proposals that could hit its businesses.

Shares of the company have slid almost 8 per cent since reaching a record high in mid-December. Here are four challenges the company is facing:

Aramco deal delay

Ambani told shareholders in August that Reliance Industries would sell 20 per cent of its oil and petrochemicals unit to Aramco in a deal valuing the business at $75 billion. The sale is crucial to reduce the group’s net debt, which was about $22 billion at the end of March 2019.

But in December, the Indian government requested a court to stop the proposed sale to help ensure the Mumbai-based company has enough assets to pay claims in an arbitration case related to profit sharing and royalty payments between Reliance Industries and its partners. Reliance Industries says the government’s plea isn’t tenable legally and should be dismissed.

Reliance Industries expected to complete the Aramco transaction by March subject to due diligence and regulatory approvals, but said in January that although the talks with Aramco were making “good progress”, a definitive pact is still a few months away. The talks have gathered pace in recent weeks.

Income tax investigation

India’s tax department has widened a probe to find whether some Ambani family members have evaded tax. The conglomerate has denied that they have dodged taxes.

The investigation is based on information the government received from French authorities in 2011 about 700 Indians who had accounts at HSBC Holdings Plc’s Swiss branches. While tax probes are common in India and are, in many cases, driven by politics, the country’s richest family becoming the subject of an investigation is unprecedented and has surprised many. Ambani is Asia’s richest person, with a net worth of about $58 billion.

Protective tariff scrapped

Reliance Industries, the country’s largest producer of a chemical used to make polyester yarn, will face more competition in the segment after a proposed cut in import duties for purified terephthalic acid. Finance Minister Nirmala Sitharaman said the government is getting rid of the duty to help ensure the easy availability of the commodity at competitive prices.

Tax on investment trusts

The government has also proposed a change to dividend distribution tax, a step that could slow efforts of companies to raise funds through selling units in investment trusts.

Reliance has been trying to raise funds and pare debt by selling a stake in trusts that hold its telecom towers and optical-fiber network. The change in rules will curtail returns for investors in the trusts by forcing them to add dividends to their total income and paying tax.

The impact of higher tax for unit holders may make equity raising challenging, according to Shubham Jain, a senior vice-president at ICRA Ltd..