RELIANCE POWER BONUS ISSUE
Mega Effort that could end in Vain
February 25, 2008
Reliance Power or to be specific Mr. Anil Ambani is taking an unprecedented effort to compensate the investors who subscribed to its IPO. The intention behind the attempt look some what obvious. The group has a line up of IPOs planned and therefore wouldn't want loose the confidence that the investors have in the group.
Reliance Power today announced that it would issue bonus shares in the ratio of 3:5 to non promoter share holders. This bonus issue that is planned is certainly unprecedented. Atleast in the history I knew, there weren't any company that offered bonus shares only to a particular group of shareholders.
Before you go through the article, the first thing I would like to suggest to you is; Do not jump and buy the stock today based on the euphoria created by the news. There are still a lot of things yet to be clarified.
Now continuing further; This bonus issue is also unique in the way in which it would affect the shareholder wealth. Generally, when a bonus share is issued to all the shareholders the value per share would come down as the value of assets that each share is entitled to comes down. However, in this case, the value of a share wouldn't come down to that extent as only non-promoter shareholders are given the bonus shares. This would mean that the stake of such investors in the company would increase. This bonus issue is expected to increase the stake of non-promoter shareholders to 15% from 10%.
I am not a legal expert, but I think the company will have to take care of a lot of legal complexities in executing this transaction. Mr. Anil Ambani has taken enough care to ensure that he is the only party loosing out on the transaction by gifting a portion of his holding to Reliance Energy which would keep the Reliance Energy's stake at the same level. A report in Business Line today has also raised the question about the taxability of the stake gifted by Mr. Ambani to REL.
It is certainly understandable that the company is taking a huge effort to keep the investors happy. But will these solutions really meet its goals?
The main problem arises from the fact that a lot of shares has already changed hands from the original IPO investors. So, who are going to be the recipients of these bonus issue? The company is yet announce that. Whoever be the recipients, the company is going to leave a whole lot of investors unhappy.
First of all, if the bonus issue is awarded to shareholders who are currently holding the shares then the original IPO investors who have already sold the shares at a loss are going to be kept unhappy.
If the bonus shares are issued to the IPO investors, then the effective price per share subscribed in IPO would come down to Rs.269. This would mean that the investors who have subsequently bought the shares at above Rs.300 or Rs.350 in the secondary market are going to be made unhappy.
The third option is to issue shares only to those shareholders who subscribed in the IPO and who are still retaining the shares. Undoubtedly this would keep all the other investors unhappy.
Luckily I haven't invested in the shares and therefore am able to look at the developments as an independent spectator. Once again, I haven't been in a situtation in which Mr. Ambani and his team are and I might not be as competent as them. However, I guess there had been a similar instance in the recent past but in a different field though and the company can take a similar step.
Well, curious about what that instance was? Don't get surprise but the man involved in that instance was none other than the South Indian Super Start Mr. Rajnikanth. No!!! Am not talking about what he did for BABA. I am talking about what he has promised for the distributors of Sivaji. As you might know, the news that came up was that while the movie was a mega hit the distributors eventually lost money as they had bought the movie at a huge premium. The solution?? A promise to give the distribution rights for his next movie 'Robot'.
Well, you might think I am getting a little silly. However, I do not see any other proper analogy to pick up and neither a better solution. What I suggest has the best move to the group would be to promise the IPO investors a higher preference for allotment of the other IPOs in pipe line.
This move might not be free from legal complexities and neither might provide the amount of immediate financial benefits that the proposed bonus issue could provide. However, if the subsequent IPOs are priced competitively and higher preference is given, then it would definitely benefit the people who actually need to be compensated. It will not leave any investor group unhappy (Ofcourse, investors planning to invest in the other IPOs of the group but who haven't subscribed to the Reliance Power IPO might be a little unhappy).
In any case and whatever be the methodology the group attempts; if the company emerges successful in making all its non-promoter shareholders (IPO investors and current investors) happy then it is definitely going to be a great and commendable effort and would definitely make Mr. Ambani the object of blind faith for the investors.
