Unconventional Power!!!

There are many things unconventional about Reliance Power's IPO and the happenings thereafter... the largest IPO, largest collection, largest refund, largest family of shareholders and to top it all... trading below the offer price from the day of listing!! Anil Ambani has now come up with another unconventional idea.... he has announced his plan to compensate investors with "free" bonus shares for the losses suffered!!

The Board of Reliance Power is meeting on February 24, 2008 to consider allotment of free bonus shares for all its shareholders other than the promoters as one of the measures to help curtail the losses incurred by its investors. This is the probably the first time a company is attempting to do something like this. This comes with its own share of issues:

1. Legal framework

In my opinion, a company has to allot bonus shares to all shareholders (of a particular class) and a company cannot allot bonus shares only to one group of shareholders (of a particular class). A shareholder can renounce his right to participate in a "rights issue", a shareholder may chose not to participate in a "buy-back offer", a shareholder may chose not to participate in a "open offer", I don’t think a shareholder can renounce his right to get bonus shares - Though a set of people argue that there is nothing in the law which prohibits a shareholder from renouncing his bonus shares. The moot question here is, are bonus shares optional?? The answer I think is "no".

Hence, it would be interesting to see how ADAG addresses this. He may get the promoters to renounce the bonus shares or get them to gift some of their shares to the investors.

2. How will he chose the eligible investors?

The second and a more important question is, how will Anil Ambani choose the investors who are eligible for the bonus shares?? Let us assume he chooses the list of shareholders who were allotted shares as a part of the IPO, then he would end up giving "free" shares to even people who have sold their shares at a profit (remember… there were trades on the first day at prices greater than Rs 430). Alternatively, let us assume he chooses today as a cut-off date and allots shares to all shareholders who hold shares today, then he would end up giving "free" shares to people who have purchased shares at less than Rs 430 and end up not giving "free" shares to people who sold shares at a loss between the day of listing and today (at a price less than Rs 430).

3. Will the shareholders actually profit or will it be a perception??

Finally, it would be interesting to watch if the shareholders will actually make any money. The EPS of the company (when it starts to make profits!!) will be lower after considering the fresh shares. Hence, the price should correct and go down a little. In my opinion, the share will not trade at the same price after the "free" shares are distributed and therefore ADAG may not compensate the shareholders by much (an investor holding 10 shares while the price is Rs 400 is not worse off compared to an investor holding 16 when the price is Rs 250).

4. How will it impact Reliance Energy Limited??

As per the press release from Reliance Power - "the promoters have indicated that they will accept the dilution of the promoter group's shareholding in Reliance Power in the broader interest of protecting investors". As per the offer documents, the post-IPO holding of the promoter group would be around 89% and Reliance Energy Limited owns almost 45% of the company (post-IPO). The above statement would mean that Reliance Energy Limited has indicated that it is accepting the dilution. Doesn't this require the approval of the shareholders of REL? Isn't this move to dilute a holding in Reliance Power detrimental to the shareholders of REL? Wouldn’t this affect the valuation of REL?

The Reliance Power Board is meeting on February 24, 2008 to consider options to reduce the cost of acquisition of the shares and help the investors cut their losses. One of the proposals being considered is the issue of “free” bonus shares discussed above. The top brass and the legal team of ADAG will really have to “POWER ON” their brains to achieve the above… else the Street will “POWER OFF” all future issues of ADAG.