Where else in this world, an IPO would be launched at a premium of Rs420 per share and within a week of listing the company announces bonus shares due to its poor showing. Anil Ambani, I believe is not that philanthropic in doling out bonus shares but he is slated to hit the capital markets again in the next 2-3 months for the Reliance Infratel IPO. Better luch investors!!
I came across this article by Ms Sucheeta Dalal on Reliance Power IPO and the bonus shares announcement. Sucheeta Dalal is an active investor protection activist whose consistent efforts in 2000-01 brought to light the mis-deeds of Dinesh Dalmia of Square D software.
Reliance Power's Strange and Selective Bonus Proposal
22 Feb, 2008
By Sucheta Dalal
One of the first tasks before Securities and Exchange Board of India's (SEBI) brand new chairman would be to decide on the selective bonus proposed by Reliance Power Limited (RPL) to reduce the price paid by its retail investors. The company claims that it is offering "free shares" to "all the shareholders, excluding promoters who would accept dilution of their stake in the broader interest of over four million investors." That sounds wonderful and the shares shot up 7% after the announcement; but remember, the promoters paid just a fraction of the money coughed up by retail investors and are the biggest beneficiaries of the IPO. More importantly, the rather too-clever bonus proposal stretches the rulebook and probably rips it as well. It ensures a discount to retail investors with a minimal increase in capital and a substantial jump in market capitalisation. We asked a cross section of finance experts for their opinion on whether a bonus can be selectively issued to some shareholders. They included a prominent investment banker associated with the issue. Not one of them was certain it could be done; the best they could say was that RPL must have obtained legal opinion before making the announcement. Well, yes, but then the Reliance group - in fact both factions - is famous for stretching the rulebook or evolving unique interpretations of statute to suit its purpose. A former SEBI executive director is emphatic that such a bonus "vitiates the concept of equity and is like a preferential offer." Let's consider some issues raised by the announcement.
- If SEBI and the Ministry of Corporate Affairs (MCA) permit a selective bonus that excludes the promoters, will it also permit the reverse where the promoters use their majority stake to award themselves a bonus and exclude retail investors or a strategic investor? Once the door is opened to a selective bonus issue for RPL, it will permit various forms of shareholder abuse.
- Can RPL announce a selective bonus without even a board meeting? Is the role of the board limited to rubber-stamping the bonus ratio? More importantly, will SEBI question them?
- Can RPL unilaterally decide to exclude Reliance Energy from the bonus without REL's board discussing the issue or seeking its shareholders' consent? Remember, Reliance Energy investors have already gone to court over the unilateral transfer of power generation licences to Reliance Power and the Mumbai High Court asked SEBI to look into their grievances. However, former SEBI chairman, M Damodaran brushed aside all issues and cleared the IPO.
- The bonus announcement punishes those investors who sold the shares on listing by using their money to pay those who remained invested. So you have a unique situation where a company that over-priced its shares punishes those investors who prudently cut their losses and rewards those who bought the shares at a lower price after they were listed. Who were these smart buyers who got a double benefit? Can a company use the share premium account to issue a bonus within days of listing? Does this not make a mockery of the IPO price discovery process? Normally, a bonus has to be paid out of free reserves; here is a company that has not even achieved financial closure (but was still allowed to raise public money) selectively distributing the money it has collected as share premium.
- The bonus has been announced to compensate investors and make amends for the high offer price and excessive hype; but can a bonus issue be a form of compensation? What are the tax implications of such a payout?
- What exactly does this bonus mean for the promoters of RPL and the shareholders? The promoters invested just Rs2,000 crore, whose post-listing value had jumped to around Rs75,000 crore. On the other hand, public shareholders invested Rs12,000 crore whose value dropped to Rs7,500 crore in a matter of days. Who is being compensated?
- On another note, grey market operators, who had refused to honour their commitments after RPL shares listed at a discount to the offer price, suddenly turned honourable around the time that the bonus was announced. Some say that they received crisp Rs1,000 notes in cash in lieu of the money they had earned by short-selling the shares. With the grey market having restored its credibility, the stage is set for similar operations in future IPOs, unless SEBI, under the new chairman, puts an end to this dubious activity.
As we said earlier, the new SEBI chairman has quite a task in dealing with this issue.