Monday 18 February 2008

Reliance Power bonus to drive the market

When Reliance Power announced an initial public offering (IPO), it got attention for its size. The hype and marketing blitz that followed stoked public imagination and when the issue opened, it was sold out in seconds.

Contrary to public expectations though, when it listed, the markets hammered the stock down and the company continued to stay in the headlines. Just when the shock was beginning to settle, in an unprecedented move, Reliance Power has proposed to issue bonus shares to stakeholders in the company.

Seemingly a first for any company in the world that is just about a week old on the stock exchange, the company’s board will meet in Mumbai on February 24 to consider the proposal and decide the bonus ratio. The company, however, will not issue any shares to its promoters, a spokesperson for the group said.

Market veterans say group chairman Anil Ambani took it very personally as the stock markets pounded the scrip. Add to this a few million rattled retail investors and the risk of eroding what ‘Brand Ambani ’ stands for in the stock market . All these reasons, analysts said, are compelling the company to come up with a dramatic plan like issuing a bonus to restore confidence.

Once these bonus shares are issued , the cost of acquiring each share will fall to below Rs 430 for retail investors and Rs 450 for institutional and other categories of investors , a company release said. “Several companies have listed at below their offer price and have done nothing to compensate shareholders ... To that extent, this is a trendsetting move,’’ the spokesperson said.

Usually, companies issue bonus shares from their reserves. But in this case, R-Power is a new entity and has no reserves to fall back on. It will have to use its share premium account to issue the bonus. Of the Rs 11,560 crore mobilized through the recent IPO, roughly Rs 11,300 crore is in the share premium account. How much of this will be utilized will depend on the ratio of shares it will issue as bonus.

Market players, although surprised , are divided on what it means. There is a school of thought which argues that this is the promoters’ way of acknowledging they had overpriced the issue, an argument hotly contested by Reliance Power.

SHOCK THERAPY

Largest IPO in Indian history mobilises Rs 11,560 crore. The issue was priced at Rs 430/share for retail investors and Rs 450 for others. When the bids opened on Jan 15, within 60 seconds it was oversubscribed two times.

Funds committed on Day 1 was a staggering $25 billion or about Rs 1 lakh crore. The IPO closed on Jan 18, with book-size of $190 billion or Rs 7.5 lakh crore. It was subscribed 73 times from 50 lakh applications l Listed on the bourses on Feb 11, opens trading at Rs 548.

Within seconds, falls to Rs 430. Stock hammered in first three sessions, with all-time low of Rs 333 and a high of 599. On listing day, the sensex crashes 834 points. Current price Rs 385, Current market cap Rs 87,000 crore and Total investor wealth lost since listing Rs 1,352 crore