THE RELIANCE POWER IPO THAT BECAME INDIA’S BIGGEST EVER IPO, SAW INVESTOR ACTIVISM INFLUENCE PROMOTER ANIL AMBANI TO DO SOMETHING INDIA RARELY WITNESSES – DILUTE HIS STAKE TO SUPPORT INVESTORS
On February 11, 2008, investors operating in the Indian stock market short-circuited Anil Ambani group company Reliance Power’s maiden appearance on the bourses. After accomplishing the country’s biggest ever IPO, the company was scheduled to debut on the tickers on that particular day.
The opening bell rang and with it started the misery for all those investors. The stock, which was issued at Rs.450 per share and was expected to offer a return of at least over Rs.300 per share on listing, slipped to an intra-day low of Rs.355.05 and finished the day at Rs.372.50, 17% below the issue price. Though Anil Ambani, Chairman, Reliance ADAG, made a killing of around Rs.25,000 crores from the IPO, his investors, who were very enthusiastic to get a slice of the IPO, were seen rushing to offload their shares. So much so that the Sensex itself dropped 863 points with the motion and the Financial Times in London wrote: “It’s only when the tide goes out... that you discover who has been swimming naked. Few are caught in quite such an alarming state of undress as Reliance Power.”
It was not that RPower was the only share to list at a discount at that time, there were few others as well, but the problem with the particular scrip was its size and pedigree. Backed by Reliance’s track record of delivering returns, the issue had created a record by attracting bids worth Rs.752,000 crores while there were shares worth Rs.11,700 crores on offer.
“The primary market was on a high at that time. About 10% returns on listing was kind of an unsaid norm prevailing in the market. And Ambani’s stock meant a lot for the public. When smaller IPOs were offering big returns, investors were quite sure of generating a handsome return from the RPower IPO. Moreover, the market sentiments were also quite positive for the power sector. Riding on all these factors, the issue was oversubscribed a mammoth 73%,” says Jitendra Kumar, Fund Manager, Taurus Asset Management Company. Investor confidence was so high that in the grey market, the share was pegged between Rs.700 and Rs.900. But its debacle on listing made every one run for cover, and the grey market activities came to a standstill.
But then, the investors’ problems did not stop there; the main problem was yet to come. In order to invest in the RPower IPO, most of the investors had withdrawn funds from other investment positions and transferred the same into RPower. Moreover, as an article in Knowledge@Wharton suggested: “Many investors had borrowed at high interest rates to buy Reliance Power shares. A back-of-the-envelope calculation [based on the lending rates prevalent then] shows that the share would have had to list at Rs.600 for them to break even. What happened was a disaster for these speculators. Many are refusing to pay up. And there is turmoil in the illegal betting shops in cities like Rajkot and Baroda.”
The situation was even worse in many other cases (applicants who applied for less than 225 shares) where investors were not even allotted shares. They kept on losing in returns on their investment for near about a month. And by the time they got the refunds, there was very little hope left in the market to earn some quick profits to make up for the losses as the market itself had slipped into the hands of the bears due to lack of demand and increased global recessionary pressure. During the IPO, Anil Ambani had repeatedly promised that investors will not suffer, and what unfolded post the IPO was absolutely the opposite. The situation provoked some investors and high net worth individuals (HNIs) who suffered heavy losses in the particular IPO to move ahead and ask the market regulator, Securities and Exchange Board of India (SEBI), to carry on a probe for any foul play by the promoters of the IPO.
Anil Ambani cried foul and released a statement in the media complaining that rival business groups were intentionally trying to undermine the group’s fair name and reputation. But then, the harm had been already done, and people had started losing faith in the RPower stock, at least during that particular period.
Considering the gravity of the situation, the RPower Board soon announced that it was ready to offer 3 bonus shares for every 5 held by shareholders. What was more interesting in that announcement was the fact that all shareholders were entitled to the bonus shares except the promoter groups, Reliance Energy and Anil Ambani’s personal investment vehicles, which meant Anil Ambani was compensating investors’ losses by diluting his own stake in the company. The move brought down his stake to 40% from 45% on the day of listing. And for those investors who had held onto their stocks despite the turbulence, it certainly was a moment to cheer. The move, while reducing the stock price by 40% for retail shareholders to Rs.269 per share, also ensured that in general, every stockholder’s individual net worth increased considerably due to Anil’s stake dilution.
Experts like erstwhile SEBI Chief M. Damodaran may not consider the investor outcry in the case RPower as a true form of activism, but there is probability in the fact that this investor activism was what had made Anil Ambani do something rarely – if ever – seen in Indian promoters.
On February 11, 2008, investors operating in the Indian stock market short-circuited Anil Ambani group company Reliance Power’s maiden appearance on the bourses. After accomplishing the country’s biggest ever IPO, the company was scheduled to debut on the tickers on that particular day.
The opening bell rang and with it started the misery for all those investors. The stock, which was issued at Rs.450 per share and was expected to offer a return of at least over Rs.300 per share on listing, slipped to an intra-day low of Rs.355.05 and finished the day at Rs.372.50, 17% below the issue price. Though Anil Ambani, Chairman, Reliance ADAG, made a killing of around Rs.25,000 crores from the IPO, his investors, who were very enthusiastic to get a slice of the IPO, were seen rushing to offload their shares. So much so that the Sensex itself dropped 863 points with the motion and the Financial Times in London wrote: “It’s only when the tide goes out... that you discover who has been swimming naked. Few are caught in quite such an alarming state of undress as Reliance Power.”
It was not that RPower was the only share to list at a discount at that time, there were few others as well, but the problem with the particular scrip was its size and pedigree. Backed by Reliance’s track record of delivering returns, the issue had created a record by attracting bids worth Rs.752,000 crores while there were shares worth Rs.11,700 crores on offer.
“The primary market was on a high at that time. About 10% returns on listing was kind of an unsaid norm prevailing in the market. And Ambani’s stock meant a lot for the public. When smaller IPOs were offering big returns, investors were quite sure of generating a handsome return from the RPower IPO. Moreover, the market sentiments were also quite positive for the power sector. Riding on all these factors, the issue was oversubscribed a mammoth 73%,” says Jitendra Kumar, Fund Manager, Taurus Asset Management Company. Investor confidence was so high that in the grey market, the share was pegged between Rs.700 and Rs.900. But its debacle on listing made every one run for cover, and the grey market activities came to a standstill.
But then, the investors’ problems did not stop there; the main problem was yet to come. In order to invest in the RPower IPO, most of the investors had withdrawn funds from other investment positions and transferred the same into RPower. Moreover, as an article in Knowledge@Wharton suggested: “Many investors had borrowed at high interest rates to buy Reliance Power shares. A back-of-the-envelope calculation [based on the lending rates prevalent then] shows that the share would have had to list at Rs.600 for them to break even. What happened was a disaster for these speculators. Many are refusing to pay up. And there is turmoil in the illegal betting shops in cities like Rajkot and Baroda.”
The situation was even worse in many other cases (applicants who applied for less than 225 shares) where investors were not even allotted shares. They kept on losing in returns on their investment for near about a month. And by the time they got the refunds, there was very little hope left in the market to earn some quick profits to make up for the losses as the market itself had slipped into the hands of the bears due to lack of demand and increased global recessionary pressure. During the IPO, Anil Ambani had repeatedly promised that investors will not suffer, and what unfolded post the IPO was absolutely the opposite. The situation provoked some investors and high net worth individuals (HNIs) who suffered heavy losses in the particular IPO to move ahead and ask the market regulator, Securities and Exchange Board of India (SEBI), to carry on a probe for any foul play by the promoters of the IPO.
Anil Ambani cried foul and released a statement in the media complaining that rival business groups were intentionally trying to undermine the group’s fair name and reputation. But then, the harm had been already done, and people had started losing faith in the RPower stock, at least during that particular period.
Considering the gravity of the situation, the RPower Board soon announced that it was ready to offer 3 bonus shares for every 5 held by shareholders. What was more interesting in that announcement was the fact that all shareholders were entitled to the bonus shares except the promoter groups, Reliance Energy and Anil Ambani’s personal investment vehicles, which meant Anil Ambani was compensating investors’ losses by diluting his own stake in the company. The move brought down his stake to 40% from 45% on the day of listing. And for those investors who had held onto their stocks despite the turbulence, it certainly was a moment to cheer. The move, while reducing the stock price by 40% for retail shareholders to Rs.269 per share, also ensured that in general, every stockholder’s individual net worth increased considerably due to Anil’s stake dilution.
Experts like erstwhile SEBI Chief M. Damodaran may not consider the investor outcry in the case RPower as a true form of activism, but there is probability in the fact that this investor activism was what had made Anil Ambani do something rarely – if ever – seen in Indian promoters.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
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IIPM's Management Consulting Arm-Planman Consulting
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IIPM: Indian Institute of Planning and Management
IIPM makes business education truly global
IIPM B-School Detail
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
For More IIPM Info, Visit below mentioned IIPM articles.
Prof. Rajita Chaudhuri's Website
domain-b.com : IIPM ranked ahead of IIMs
Arindam Chaudhuri's Portfolio - he is at his candid best by Society Magazine
IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting
Professor Arindam Chaudhuri - A Man For The Society....
IIPM: Indian Institute of Planning and Management
IIPM makes business education truly global
IIPM B-School Detail
