Mukesh Ambani
Mukesh Ambani | Simon Dawson | Bloomberg
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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% since reaching a record high in mid-December. A spokesman for Reliance Industries declined to comment. Here are four challenges the company is facing:

Aramco Deal Delay:

Ambani told shareholders in August that Reliance Industries would sell 20% 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 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 2020 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, according to people familiar with the matter.

Income-Tax Investigation:

India’s tax department has widened a probe to find whether some Ambani family members have evaded tax, according to people familiar with the matter. The conglomerate has denied that they have dodged taxes.

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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, the people said, asking not to be named citing rules.

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, according to the Bloomberg Billionaires Index.

A spokesperson for the tax department didn’t respond to an email seeking comment. The Economic Times had earlier reported the investigation in December.

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. In her 1 February budget speech, 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, including Reliance Industries, to raise funds through selling units in investment trusts.

The conglomerate 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., the local unit of Moody’s Investors Service.-Bloomberg


Also read: Mukesh Ambani recasts his TV network before a potential stake sale


 

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5 Comments Share Your Views

5 COMMENTS

  1. The funds received from sale of stake to Saudi Aramco will be used to pay off the debts of Reliance and will benefit the company and will make its financial position stronger. So how this deal is linked to various issues against Reliance and Ambanis is not clear. These issues would be around with or without the deal with Saudi Aramco. As regards dividend distribution tax, it is a budgetary proposal and is not particularly directed at Reliance. The Income Tax issues are forever! The article seems to be linking unrelated issues together! These issues apart, we need this welcome deal at a strategic level for deepening economic relations with Saudi Arabia and GCC in general and should be completed expeditiously.

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