Investment advisor Deepak Shenoy pointed out today that Reliance Industries' reporting approach in its balance sheet is what has made Jio look profitable just 1.5 years after starting operations - RIL has provided it strong cash flow by first taking out a loan, and then buying shares in Jio. This way, Jio pays no interest on the cash injection, since those interest payments are taken on by the parent company.
While this form of accounting is legal, for investors this approach may be troubling, since it doesn't truly reflect the profit situation and ROE of Jio. Reliance ha already invested more than Rs. 80,000 crore in Jio - for a standalone company, this would be a massive interest payment burden and depreciation costs. But thanks to RIL's accounting, Jio's books look clean and the telecom business looks more successful than it currently is.
The amount of debt that RIL has taken on for Jio has already raised flags for brokerages such as Jeffries and UBS, and UBS had issued a sell call on Reliance citing the massive debt.