Reliance Power’s decision to give bonus
Are companies supposed to provide insurance to investors against the listing loss?Is running a professional business a personal business? The answers to these questions seem to be affirmative in the light of Anil Ambani’s decision to give a ‘bonus’ share to the stockholders of Reliance Power (RPower), his newly listed power generation venture.
RPower had hit the primary market in January to raise $ 3 billion to fund 13 power projects. The IPO, which is so far the biggest public issue in India, had got overwhelming response from the investors and saw applications worth over $ 21 billion. Most of this overreaction was backed by the investors’ hope of getting a good listing gain. The hopes were fuelled by the premium figures in the grey market*.
However, by the time the scrip got listed, the bull-run was almost replaced by the bear hug. Still, many investors were hopeful that Mr Ambani would use all his might to keep the stock floating above the offer price of Rs 450. To the disappointment of many, the stock closed 17% lower on its listing day. It got pummelled further in the next few days. At the end of the third trading session, it had lost 22% from its offer price.
The loss is borne by one and all who decided to be a party to the dream of the younger scion of the Ambani Family. And, it seems Mr Ambani Jr has taken this personally. He has made his mind to dilute his own stake in the company to dole out some more shares to the shareholders. The scheme though called as bonus is not a bonus in true sense as Mr Ambani himself would not get more shares.
It would be more like an arrangement to give some more shares (the ratio was not yet decided at the time of writing this article) to the investors to bring down their cost of ownership of RPower shares. This might come under the regulator SEBI’s scanner as something like this has never happened so far.
One subtle point in this whole story is how prudent it is for the management of a company to take measures to cut losses of the investors arising out of circumstances which are purely of speculative nature. Since when have the company boards started bothering about stock market fluctuations? Were we not taught in the B-schools that the management is only bothered about the stakeholder value in terms of the earnings per share and dividends? Further, is stock market a place to offer risk-free returns? Were the investors that put money in the RPower’s IPO not knowing that their investment is eligible to shrink?
So, why does RPower board think that it should protect investors from the stock market frenzy? And, how often does it think it can bail out the investors?
The one answer to all the questions above can be that RPower’s decision to give the ‘bonus’ allotment is bizarre. Investors with burnt fingers may feel the relief after learning about the prospects of the windfall, but this may trigger a wrong practice in the primary market. Just imagine a scenario wherein the company offers its shares at an exorbitant valuation, and if at all the listing price crashes below the offer price would come out with a ‘bonus’ offer.
The intention of Mr Ambani might be noble but the act is not…
*Grey market: It is an undercover illegal market where equities are traded even before their official listing. The premium or discount over the offer price at which the stocks change hands in the grey market has a great influence on the actual listing price. Given this, it is a potential place to con gullible investors into putting their money in IPOs. For instance, while the RPower IPO was on, its grey premium was touted to be Rs 600 meaning that buyers in the grey market were expecting it to list at a much higher premium. No wonder then that the IPO was oversubscribed within a minute after the issue was open. However, as the listing date approached, the grey premium had fallen to just about Rs 200.
Labels: Money matters
posted by Ranjit @ 2/19/2008 03:23:00 pm
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