Last Updated on Mar 24, 2021 by Manonmayi

From going bankrupt in 2017 and being acquired by Patanjali in 2019 to getting re-listed on the bourses in early 2020 and zooming manifold in just a few months hence, Ruchi Soya Industries Ltd has made a major comeback and taken investors by surprise.

This comes even as most companies are trying to simply survive the coronavirus pandemic. Then, how did Ruchi Soya share rise manifold and offer several thousand times higher value to its investors? What’s the secret? Well, none. Its plain financial measures that drove the rally:

  1. Low free-float
  2. Debt restructuring

This article covers:

From bankruptcy to turnaround

The concept of low-free-float

Merits and demerits of Ruchi Soya’s low free-float

The concept of debt restructuring

From bankruptcy to turnaround

In Dec 2017, the National Company Law Tribunal (NCLT) had ordered insolvency proceedings against Ruchi Soya Industries owing to its piling debt. 2 years later, in Nov 2019, the company was delisted and in Dec of the same year, Patanjali acquired Ruchi Soya for Rs 4,350 crore. Fast forward to 27th Jan 2020, Ruchi Soya was re-listed on bourses at Rs 17 apiece and ever since the stock has been mostly locked in the upper circuits. In just a few months since then, Ruchi Soya’s market-cap has grown manifold.

Let’s now see how a low free-float and debt restructuring fuelled the Ruchi Soya share’s rally.

The concept of low-free-float

The outstanding share capital of a company—the total number of shares issued— including those held by the public, management and employees of the company, and institutional investors. The shares held by other than the public are known as ‘restricted shares’ as these are reserved for the insiders of the company or institutional investors. Meaning, they aren’t available for public trading.

The shares available for public trading are called free-float. Now, restricted shares can either be a large or a small portion of the total outstanding shares of the company. If these shares form a large part of the outstanding share capital, then it is said to have a low free-float because shares available for public trading are relatively lesser. But if the opposite is true, then the share capital is said to have a high free-float.

Merits and demerits of Ruchi Soya’s low free-float

If low free-float stocks garner the attention of public investors who wish to bet on them, their prices can rise and the shares can offer good returns. However, since a majority of the low free-float stocks are held by the promoters, the prices are also subject to their manipulation. Speaking of Ruchi Soya before restructuring, 80% of the stake was held by 95,485 public shareholders and only 20% was restricted. But after its takeover by Patanjali Group, only 1% of the stake is held by the public.

The remaining 99% of the shares are held by its new promoters—the Patanjali Group. To elaborate, out of the total 29.58 crore outstanding shares, the public only holds 28.59 lakh units, indicating that Ruchi Soya is a low-free float stock. And that’s possibly why the Ruchi Soya share price is on a sprint.

But low free-float stocks have an inherent risk as the prices can move rapidly in either direction. Meaning, if the stock can spike dramatically, there are also chances that it can tumble as quickly. Therefore, if you are looking at buying the shares of Ruchi Soya, it would be wise to consider the other pointers of a healthy company before making an investment decision.

One such vital indicator is the management of the company. Should the entity be managed by experienced and professional management, it is more likely that the stock is rallying for the right reasons. However, the opposite is also true and allegedly, this applies to Ruchi Soya Industries, as its management is not exactly professional, according to Outlook Business. Besides, it may also be better to do a fundamental and technical analysis of Ruchi Soya Industries. This will help you get to the core and decide basis what really matters in the long-run.

Now, it’s natural to wonder if a company having a low free-float can stay listed on stock exchanges. Because, why would a company be allowed to be listed on the bourse if only a minor part of its shares are available for public trading? Well, as per SEBI, a company can only remain listed on the bourses if its promoters’ holdings are not more than 75% of the stake. So, why is Ruchi Soya still on the bourse? Well, Ruchi Soya was re-listed after being restructured and now, it has a new set of promoters. This gives it a few more years to meet this listing criterion. For now, it can stay.

The concept of debt restructuring

The second contributor to Ruchi Soya Industries’ share price rally can be debt restructuring, which happens when a company finds it difficult to repay its existing debt obligations. The entity can restructure its debts by negotiating the terms of repayment with the creditor. There are two ways out:

  • Reduce the interest rate on credit
  • Extend the due date to repay the debt

These resolutions make it relatively easier for the ailing company to meet its debt obligations. That’s what kept Ruchi Soya Industries from drowning. Here’s what happened.

First, Ruchi Soya’s lenders wrote-off close to 50% of its dues. Second, after its acquisition by Patanjali Group, the Baba Ramdev-led company paid Rs 4,350 crore to the banks against the balance dues, via equity and debt. But there’s a twist here. The Rs 4,350 crore compensation didn’t come out of Patanjali’s pocket alone. In fact, Patanjali only paid 25% of the amount and the remaining 75% was financed by a consortium of lenders led by the SBI. To elaborate, Patanjali only infused Rs 1,150 crore as equity while the balance of Rs 3,200 crore was financed by banks.

Surprisingly, these were the same set of lenders that were previously chasing Ruchi for repayment. But what was in it for the banks? Well, Ruchi Soya was considered a new entity after its acquisition and so these bank loans were also treated as fresh disbursals as against bad loans. Now that you know the possible reasons for the Ruchi Soya share’s rally, it is not very difficult to understand how the stock registered ~39,210% returns since Dec 2019.

Track the prices of Ruchi Soya Industries here. Additionally, you can also refer to the investment checklist, key metric, returns, recent news, and more about the stock on Tickertape.

Aradhana Gotur
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