Sunday 24 February 2008

Reliance Power - bonus ratio to be the key

Even as legal minds continue to debate the technical issues surrounding Reliance Power’s proposed bonus issue, investors are eagerly awaiting the bonus ratio expected to be announced after the board meet on Sunday.

The Reliance Power board is scheduled to meet on Sunday to consider issue of bonus shares and/or other measures aimed at reducing the cost of acquisition for minority shareholders, who have suffered losses due to the poor performance of the stock since listing.

Since the promoters will not be issued any bonus shares, their stake will automatically be diluted from the current 90%, once the board clears the proposal. Shares of R-Power closed at Rs 417 on BSE, down 1.2% on Friday.

For instance, if the market price on the record date is Rs 400 a share, then the minority shareholders’ cost of acquisition will come down by Rs 42-150 per share, depending on whether the company allow one bonus share for every five held, or one bonus share for every one held. There would have been no gains to any shareholders if the promoters would also have subscribed to the bonus issue.

The calculation is based on the post-bonus dilution in equity capital of R-Power and a pro-rata adjustment in its share price. If the board decides to issue one bonus share for every five shares held by the non-promoters on the record-date, then dilution works out to 2% and there would be a similar decline in the stock price. In comparison, the investor’s acquisition cost will fall by 20%.

In case of a 1:1 bonus, the dilution works to be 10% and the R-Power market price is expected to be adjusted by the similar price while the investor’s acquisition cost will come down by half.

If price falls below Rs 400, the gains will heavily depend on the bonus ratio. For example, if the price on the record date falls to Rs 300 per share, the investors stand to profit only if the company decides to issue at least one share for every two shares held. In the worst case scenario, if the share prices of R-Power plunge to Rs 250 by the record date, then the investors will not make money even if the bonus ratio is a liberal 1:1.