Posted by: John Elliott | February 25, 2008

Reliance issues bonus shares to save face

Anil Ambani, one of India’s richest businessmen, hit the world’s market headlines for the third time in just over a month yesterday when Reliance Power, which he controls, announced a bonus issue. Under the new offering, shareholders will receive three Reliance Power shares for every five bought last month in India’s largest-ever initial public offering.

That issue picked up $3 billion in just one minute when it was launched on the Mumbai stock market, even though the company has completed no projects and has no income stream. But, when the stock listed on the market on February 11, it was hit by world market conditions and, initially, by a lack of local liquidity. It fell 17.2% to Rs372.50 from the Rs450 issue price on the first day’s trading.

Ambani claimed that the price was being driven down by interests trying to undermine his business. The price recovered to Rs416 after the bonus plan was mooted and today it hit its original price of Rs450.

So has Anil Ambani, whose umbrella business is the Anil Dhirubhai Ambani Group (ADAG), done well or has he stepped into a legal and regulatory minefield, as bankers and analysts in Mumbai are saying privately?

He certainly seems to have succeeded – though maybe only temporarily – in rebuilding some shareholder confidence. This is important because he does not want to lose small shareholders’ faith in the Reliance brand that was built by his father, the late Dhirubhai Ambani.

He needs that confidence because of future IPOs – ADAG’s Reliance Communications is planning an issue for its Reliance Infratel telecommunications’ towers business.

He also doesn’t want to seem the loser when judged against the successes of his elder brother, Mukesh Ambani, who controls Reliance Industries (RIL) – the two brothers split their father’s empire in 2005. And he needed to counter suggestions that some investors might not complete payments for their shares.

But Anil Ambani has not created any new shareholder value even though the cost of the shares has nominally come down by around 40%, and he still has to gain approval from his shareholders, and from the regulatory authorities. Analysts are now saying that the share issue could run into problems because it is only being made to new shareholders, not the company’s promoters which include ADAG’s Reliance Energy (with a 45% stake) and other Ambani investment companies that have another 45%.

There are also potential profit tax issues linked with Ambani’s decision, announced yesterday, to transfer 2.6% of his personal stake in Reliance Power to Reliance Energy in order to prevent the bonus issue from diluting Energy’s stake.

Analysts and the Indian media are rarely willing to comment adversely about the Ambanis’ business and they have yet to get their teeth into these issues publicly. The broad view tonight, however, seems to be that Ambani has applied some sticking plaster to Reliance Power, and the future is still to play for.


Responses

  1. Anil Ambani’s Reliance Power was an overpriced IPO, some even argued that the pricing was all but his way to fool the investors and make big gains as promoters.

    But I want to ask you this, how many visionaries in the history have accepted their mistakes and made attempts to correct the same publicly with the speed and alacrity with which Anil Ambani has??

    Nowhere in the capitalistic world has something like this been done ever before.

  2. Anil Ambani’s IPO was quite pricey, it could also be argued that the pricing was an easy way to dupe the innocent investors who would foolishly flock because of the Ambani name.

    But kudos to the man who had the guts t

  3. India needs more companies and more business visionaries like Mr. Ambani. It is business that will transform India into a modern nation.

    Also, hopefully the Indian and U.S. nuclear deal goes through. Without adequate amount of electricity, India’s economy will come to a screeching halt.

  4. The title says it all. Anil has egg on his face; in one stroke of avarice, he has lost the confidence of the millions of shareholders whose almost blind trust his father had worked hard for decades to earn.

    Sticking plaster always shows. Anil will have to pay a price for the losses suffered by the many small investors who had no choice but to sell out at a loss on listing. Where did the grey market price of Rs 900 go? Was that not conveniently manipulated to con unsuspecting investors into investing in the Reliance brand?

    http://www.vinodksharma.blogspot.com

  5. Listing debacle, undoubtedly, put Anil Ambani’s reputation at stake and something like bonus shares allotment was always on the anvil. However, it will be interesting to see whether it is a calculated move by younger Ambani or just a knee-jerk reaction to save his (not to mention, Reliance’s) reputation.

  6. Reliance Power is a huge commitment on the part of Anil and Co. to deal with number of hurdles on its way for a success with a noble cause of powering India with energy. Its a big challenge as well, to Indian legal systems and regulators for it will show off its strength in due course. Our sincere best wishes to Reliance Power, its shareholders and beneficiaries!


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