In June 2004, Reliance Infocomm raised $250 million (about Rs 1,100 crore) by way of external commercial borrowings from a syndicate of four banks � ABN Amro, ANZ Bank, DBS Bank and ICICI Bank [Get Quote].

The terms of the loan (Clause IX of the "affirmative covenants") specify that shareholders' loans and redemption of preference shares will be "subordinate" to the loan from these banks. If the banks are not repaid, RIL can't get its money back at the end of the lock-in period.

Also, Reliance Infocomm has to repay some Rs 9,300 crore (Rs 93 billion) in debt, plus Rs 8,100 crore to RIL, or a total of Rs 17,400 crore (Rs 174 billion) - and has to generate enough cash to repay these loans.

The three tranches of RIL's preference shares are locked in for 10 years from 2003 and early 2004 and can be converted into equity, though the conversion price has not been agreed upon.

But with the redemption of the preference shares becoming subordinate to the dues of the banks, RIL has to either agree to whatever conversion price Reliance Infocomm suggests or wait till the lock-in period is over. In effect, RIL's options have been limited.

Secondly, RIL did not inform the stock exchanges that that the redemption of its preference shares had become subordinate to the dues of the banks, perhaps because Reliance Infocomm had not informed RIL of this.

Asked for comments on all this, a Reliance Industries spokesman said company executives were unavailable for comment on a Sunday.

Thirdly, the four banks had specified a maximum debt:equity ratio of 1:1 "at all times," as part of the loan agreement. But Reliance Infocomm's equity capital is Rs 3,035.7 crore (Rs 30.35 billion).

So it is allowed to raise at most another Rs 3,035.7 crore. But between March 2004 and December 2004, it raised roughly Rs 9,300 crore (Rs 93 billlion) in debt (Rs 5,000 crore (Rs 50 billion) from domestic banks in March 2004, the $250 million (Rs 1,100 crore) ECB in June and a US Exim Bank loan of $750 million (Rs 3,200 crore) in December 2004.

It could not have done so had it not subordinated the redemption of RIL's preference shares (that is, the lenders have treated the preference shares as equity) to the lenders' dues.

Lastly, RIL's investment by way of preference shares is unsecured whereas the lenders have all the assets, the current and future licences for telecom operations of Reliance Infocomm, moveable and immovable property and dues to Reliance Infocomm as security.