Why retail shareholders need to be wary of unlisted firms

livemint.com:

Mint explores real-world examples, both triumphs and pitfalls, that shed light on the challenges faced by retail investors. Reliance not at fault What unfolded at Reliance Retail is not sudden. The first signs of this saga emerged in 2019 when RIL introduced a compulsory share swap deal for Reliance Retail.

In a share swap, shares are exchanged between the parent company and its wholly-owned subsidiary, typically for the purpose of consolidating ownership or simplifying corporate structure. The swap ratio of 4:1 in the case of RIL and Reliance Retail resulted in a significant decline in the latter’s unlisted share price dropping from ₹950 to ₹475. However, with RIL’s stock price valuing Reliance Retail at a mere ₹385 per share, the offer faced opposition and was subsequently challenged at the National Company Law Tribunal (NCLT).

This forced RIL to roll back the swap deal. In 2020, SilverLake’s entry into Reliance Retail Ventures Ltd (RRVL) injected new life into the company. With a substantial investment of ₹9,375 crore, RRVL was valued at an impressive ₹4.28 trillion, giving it ownership of 99.91% of Reliance Retail.

As Reliance Retail’s share prices surged to ₹4,000, its valuation surpassed that of its parent company, exposing the disconnect between valuations and price discovery in unlisted markets. Despite Reliance Retail contributing only 30% of its parent’s revenues, it was valued higher than RIL itself. Early this month, RIL executed a minority squeeze-out, offering ₹1,362 per share for Reliance Retail.

Independent experts had assessed a valuation range of ₹850-900 per share. However, RIL still offered a 50% premium to the shareholders. Retail shareholders who had purchased Reliance Retail at inflated prices