Reliance Industries Ltd (RIL) expects to get all the necessary approvals to hive off its oil-to-chemicals (O2C) business into a separate unit by the second quarter of the next fiscal year, paving the way for the possible arrival of strategic and financial investors in the subsidiary.

RIL will spin off Reliance O2C into a wholly owned subsidiary, with the transfer of assets to O2C done on a slump-sale basis that makes the reorganisation tax neutral to Reliance.

The company will transfer $40 billion of long-term assets, $2bn of net working capital and $5bn of non-current liabilities to the O2C entity for a consideration of $25bn of a long-dated floating rate loan and $12 billion of equity.

Reliance in September last year had kicked off the process to carve out the O2C business into a wholly owned subsidiary. In July, chairman Mukesh Ambani had told the company’s shareholders they expect to complete the process by early 2021.

The proposed subsidiary will house Reliance’s refining & petrochemicals business and the 51 per cent stake held by Reliance in its oil marketing joint venture with British Petroleum.

The subsidiary will also have the global energy trading businesses, its ethane pipeline in India and its 75 per cent stake in a polymer venture with Russia's Sibur. The Malaysian petchem and polyester subsidiary will also be part of the O2C businesses.

However, upstream oil and gas producing fields such as KG-D6 and textiles business will not form part of the new unit.

In a presentation made late on Monday, Reliance said it had received approvals from the Securities and Exchange Board of India (Sebi) and the stock exchanges for the reorganisation.

Approvals are awaited from the equity shareholders, creditors, some other regulatory authorities, the income-tax department and the National Company Law Tribunal (NCLT) in Mumbai and Ahmedabad.

“The proposed O2C reorganisation may facilitate the participation by strategic as well as financial investors. The company has indicated that the discussions with Saudi Aramco are underway for a strategic transaction, without providing any further details on investment and timeline,” Manish Kaneria, managing director of RBSA Advisors said.

Fitch Ratings also said the proposed reorganisation was a step towards facilitating participation by strategic investors in its O2C businesses.

“We anticipate the reorganisation will have a neutral impact on RIL’s credit metrics and rating. We do not expect any change in RIL’s consolidated adjusted net leverage, which is approaching zero amid declining capex. We expect RIL’s liquidity at the parent level to remain strong. This would be assisted further by cash upstreaming via interest and debt repayments on long-term loans from O2C in addition to potential dividends from its large subsidiaries,’’ the rating agency added.

RIL shares on Monday gained almost one per cent to end at Rs 2,024.25 on the BSE as the street responded positively to its move.

Sources said the announcement was meant to inform investors of the progress made in creating the O2C business and the road ahead for the entity.

During the announcement of its third quarter results, RIL had said that it would disclose O2C as a separate business segment. The sources added O2C would be a separate business both at balance-sheet and profit and loss levels.

Mayank Maheshwari of Morgan Stanley said with the reorganisation, RIL will have four growth engines — digital, retail, new materials and new energy.

“While the market appreciates the value for the first two businesses we see significant upside risk to earnings and multiples for O2C as Reliance invests in new energy/technology,” Maheshwari said.

Reliance also announced its aim to work with the O2C business to reduce the carbon footprint of the company and become “net carbon zero” company by 2035.

Aramco was earlier expected to pick up 20 per cent stake in the O2C business at an enterprise value (EV) of $ 75 billion. Though this transaction could not be consummated, hopes have revived with Aramco indicating last year that it is doing a due diligence on picking up a stake.

RIL said in the presentation that talks are ongoing with Aramco for one of the largest downstream transactions in India, thereby suggesting that it still has hopes of getting the Saudi giant on board after the spin-off.

Analysts at CLSA said in a note that using the $ 75 billion EV announced for the non-binding 20 per cent stake sale to Aramco in August 2019, will translate into an equity value of $ 45 billion after deducting the $ 30 billion liabilities at the subsidiary level. Thus a 20 per cent stake sale at $ 75 billion EV, may bring in $ 9 billion cash into Reliance. ``Any new investor may be issued fresh shares and this cash inflow may be utilised to payback the loan from the parent’’, they added. The brokerage has retained its out-perform rating on the RIL stock.

Thus after the re-organisation, RIL will have businesses like upstream oil & gas, retail (through Reliance Retail where it holds 85.1 per cent), digital services via Jio Platforms where its shareholding stands at 66.3 per cent and the O2C subsidiary. It will also have other businesses like financial services, international trading division & textiles.