Posted by: John Elliott | January 15, 2008

India’s largest-ever IPO boasts investors, but no sales

An Indian power company that has no completed projects and no income stream this morning picked up $3 billion within just one minute of it launching India’s largest ever initial public offering (IPO) on the Mumbai stock market. Within half an hour Reliance Power, controlled by Anil Ambani, had offers for four times its debut price – and most bids were at the high Rs450 ($11.50) end of the issue’s price range.

“Investors are investing in the future of India,” said Palaniappan Chidambaram, India’s finance minister, when I asked him, at a lunch he gave to mark the south Indian Pongal Virundhu festival, to explain how such blind investment (in the sense that the company has no track record) could be justified.

Chidambaram wasn’t just doing his job by making a PR point. He meant it. India is the flavor of the year. Economic growth is expected to stay above 8% despite a slowdown in industrial growth and international worries. The stock market is beating expectations –the Bombay Stock Exchange Sensex index broke through 21,000 for the first time last week – that was 50% up on levels last August, though today it closed at 20,251. There is enormous optimism about India’s potential and there is a huge demand for power – capacity needs to double to over 250,000 MW by 2015.

Ambani, who runs Anil Dhirubhai Ambani Group (ADAG) which controls Reliance Power, intends to help meet that demand by becoming the country’s largest private sector power producer in a currently public sector-dominated industry. He has plans for 13 projects that would produce 28,200MW of power on sites that he has identified. He will back that up by organizing co-operation agreements with international manufacturers of turbines and generators.

That is the positive spin that has today attracted the $3 billion. But there are some downsides. As the company’s prospectus says, “We have no operating history so it is difficult to estimate our performance” and “we cannot assure you that our power projects will commence operations as expected.”

Reliance Power only has power purchase agreements in place for 4,560MW of the 28,200MW, and its first project will not start producing power until 2009-10. It has massive land acquisition needs, which are becoming more difficult to achieve at a time when conversion of agricultural land to industrial use is becoming more socially disruptive and political controversial. Then the company has to cope with all the bureaucratic and environmental hassles that usually delay large-scale projects, and it also has to fight off delaying tactics emanating from its opponents.

Life has never been easy for Anil Ambani since he split in 2005 from his elder brother, Mukesh Ambani, who is one of the world’s richest men and runs the similarly named Reliance Industries (RIL), one of India’s two largest groups. There is now bitter rivalry between the two men and their companies, and there is a constant flow of stories about how they try to trip each other up.

As recently as last Friday, India’s Supreme Court passed a blanket order that today’s IPO could go ahead despite any interim orders that might be passed by lower courts. The Ambani group had argued that there was a “malafide and illegal campaign by certain interested persons to stop or delay the IPO.” A few days earlier, another regional court in Uttar Pradesh dismissed a plea against land being allocated for one of the power projects.

The brothers’ split followed the death of their father, Dhirubhai Ambani, who founded the Reliance business and built up massive support among small shareholders as well as a reputation for excellence in executing large projects. That dual reputation still clings to the Reliance name, despite the brothers’ split, and helps to explain why today’s issue has been so successful.

I asked Anil Ambani, when he came to Delhi on his IPO road show a week ago, how he could expect to raise so much money when he had no current operations and no track record, and when there were serious reservations in the market about his ability to deliver. Replying, he talked about how Shell had almost mocked his father years ago about plans to build a massive oil refinery in India when Dhirubhai had no experience and no assured customers. Shell was proved dramatically wrong, and Anil Ambnani said he was confident of doing the same now.

“Our mindset will enable us to execute these big projects,” he said. He also pointed out that he has successfully developed the Reliance telecom business that he took from his brother during the split. One of his bankers added later that the main things to be tackled on power projects were getting permissions, assembling land, and arranging financing – all areas where Ambani has proved his skill in the past.

There is one other factor that could assure today’s investors. Anil Ambani is a workaholic driven by massive ambition and will not allow himself to be seen by his brother and the wider public to fail. At 48, he is also fit, jogging several kilometres in the mornings and sticking to a strict diet. He will not run away from the challenge of proving himself as good as Mukesh.  That may be an unusual sort of fundamental to quote on an IPO. But it’s one of Anil Ambani’s main strengths.


  1. …after all the hullabaloo, critics stand vindicated. Reliance power was listed today on stock exchanges and guess what, it opened at below its issue price and closed at 10 percent below. Will the losers learn any lessons from this? – is the moot question, however.

  2. Nice article. Some of the comments mention taking loans for investing in shares, which by any standards is financial imprudence of the worst sort. The banks are only too eager to advance “personal” loans, just to invest in this IPO. And everybody plans on selling on the first day of listing, to make a quick buck. Hats off and Best of Luck!
    BTW there is no power shortage in India, so all the news about capacity additions required is just hype. Almost 50% of power is “lost” (a.k.a. stolen) before it reaches the consumer, hence the power cuts. And if for some reason the overall economy tanks, there will be a power surplus even after the 50 % T & D loss.
    But then, when one is confronted by hype and more hype, nobody listens to any reason, at least in India.

  3. Let me see, hype plus future expectation, plus no real experience building power plants equals $3 billion. As the financial manager for a major USA firm that built a power plant in India and many others all over the world, Reliance is in for a rude awakening. Years to plan and get approvals, always delays, always cost overruns and then finding contractors, will equal massive losses. Financial engineering and ambition does not equal success in actually building and running power plants.

  4. Reliance=Manipulation. Unfortunately they’re darlings for retail investors.May be 3 months from now, you’d definitely cover a post on Reliance Fresh, retail arm of Senior Ambani. These guys don’t have real money like buffetts and bill gates of the world. They’re infact filled with illusionary money or paper money – with financial acumen. Another important point- SEBI (Securities Exchange Board of India) is very weak regulator unlike SEC, which is strong. Without a balance sheet, no scrip could come out with an IPO, but in India, with money and muscle power you could do whatever you want. Believe me, Reliance power would rise atleast 60% on first day and could give atleast 100% return in a week. There are other scrips viz., RNRL (ADAG) and RPL(Reliance Industries) enjoys higher market caps without starting their operations. With this Anil Ambani would become No.1 Richest man in the world. But Mukesh would definitely catch him with Reliance Fresh. Till then “happy hunting” for Reliance

  5. Great Article!

    This is the first article I have read that highlights the frenzy that has ensued after the pre-IPO promotions.
    I would like to share the extent of madness that people have gone to, only to invest in a phantom IPO. Hundreds of thousands of new demat accounts have been opened in the last one week. Now I am not against people investing into stocks. But such a huge volume in one week only indicates ‘herd mentality’ or perhaps, something worse.
    If that is not enough, consider this – a multitude of retail investors applied for loans so that they could invest into this IPO. Whose gain is it?
    All this showcases plain old human tendency – an oft-repeated tendency to forget that bright past is often a pale indicator of bright future.

    Much to my surprise – people aren’t even heeding to the clear precaution menionted in the prospectus. Phew!

  6. What India needs is more visionary leaders like Anil Ambani. Private industries and private businesses will make India a developed nation and not the Indian government. The government of India needs to step away and allow the free markets to operate.

  7. This article is crap.
    I am putting my Rs 1,00,000 ($2500) for this IPO. Might put another 1,00,000 during first week after debut. My relatives putting some Rs 50,000 average on this IPO. My friends talking about this IPO from months & saving like me for last few months for this IPO. All these are working class Indians & know how hard was last summer with long load shedding. Afterall stock market is about taking risk for rewards. Stock market is not for cowards. My study shows if you keep this stock for few years you will receive handsome gain. May not be gains will be like Reliance energy last years but pretty better than what you can get by investing in fix deposits. If you miss this IPO there are similar IPO lined up in Energy sector in coming months.

  8. So true, but one thing I have realized Reliance = Religion. People believe so much in the Ambani story that they will put their trust and money with them.

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