A welcome move

First, there was enthusiasm and excitement; then came disappointment and anger; and now, there’s a flash of elation—all in the space of a fortnight. Anil Ambani has reportedly decided to compensate shareholders of Reliance Power (RPL) with bonus shares for the real or notional losses they suffered when his blockbuster issue listed, and stayed, well below the offer price. We have chosen to use the word “compensate” and not “reward” (which is what bonus shares usually do) deliberately. RPL does not have any operations from which it can generate returns to reward shareholders. It seems to be a belated admission of what several analysts and investors are now complaining about—that the issue was overpriced in the first place.

Consider this: if all its plans are executed flawlessly— by no means a given—RPL will have a generating capacity of 28,000 MW in five years. NTPC, which it hopes to unseat from the #1 position in the Indian power sector, has the same capacity on the ground and is profitable. Its share price has been hovering at Rs 180 levels. RPL, therefore, charged two-and-a-half times NTPC’s valuation for capacities that exist only on the drawing boards.

Having said that, Ambani’s decision—probably based more on emotions than on economics—is expected to put some sheen back on the Ambani name. RPL’s is the first issue from any company bearing the Reliance badge that hasn’t become an instant moneyspinner for investors. But even here, there are questions.

Media reports say Reliance Energy (REL) and some privately-held ADAG companies will not get any bonus shares. One cannot rule out the possibility of some aggrieved REL shareholders taking RPL and REL to court over this. If the issue does lead to litigation, then it may take years to resolve, defeating the very purpose of the move. Then, several shareholders have already sold their shares, mostly at losses. Will the company issue bonus shares to successful applicants or the current shareholder base, which includes people who bought their stakes from the secondary market at a discount to the offer price? Also, can RPL legally issue bonus shares to investors who are no longer invested in the company?

These are issues that require clarity. But despite these riders, this move will put moral pressure on other promoters to follow Ambani’s lead under similar circumstances. This may act as a check against aggressively priced issues in future. And for that reason alone, it is a welcome move.