Anil's first float sinks Reliance
image By Indrajit
Basu
More than five million investors
waited in keen anticipation for the great man's
son to ring the opening bell at the Bombay Stock
Exchange on Monday and the start of trade in a
company that had attracted subscriptions worth
US$190 billion.
Anil Ambani, a break-away
scion of India's famed Reliance Group, had three
weeks earlier overseen the $3 billion initial
public offering - India’s largest - of Reliance
Power Ltd (R-PL) and added billions of rupees to
his own vast wealth as his fellow Indians bought
into his aura of almost unearthly success.
Then the bell rang, and for the first time
in history of Indian stock markets the Ambani
magic did not work.
Reliance Group
companies are known for producing stock-market
gains from the moment they
are listed, and for a few moments on Monday money
seemed there for the taking once more as Reliance
Power surged 19% to 538 rupees from the IPO price
of 450 rupees (US$11.42).
The promise of
lucre hung there for a few seconds, before the
dream vanished and R-PL dived to 355 rupees per
share never to return even close to the issue
price in the next five and a half hours of
trading. By the close, it was down 17% at 372.50
rupees, $4 billion of its market capitalization
wiped out and with it billions of rupees of
investors’ wealth. And tarnished, if not also
destroyed, was the invincible image carefully
built over three decades by Anil's father, the
legendary Dhirubhai Ambani, that an Ambani-float
never loses money.
In the following days,
the nightmare worsened as another $5 billion of
the market capitalization was lost. By Thursday
the stock was trading at around 364 rupees.
The sharp decline "was a big
disappointment for millions of investors who
applied [for the shares] with high hopes driven
primarily by the high-profile marketing of the
IPO", said Mumbai-based investment advisor S P
Tulsiyan. "But the worst fallout of the flopped
listing is that retail investors have lost faith
in the Reliance Group, particularly in the Anil
Ambani faction."
The blow was severe and
went far beyond Reliance Power. The listing
affected not only the stock prices of companies
controlled by Anil Ambani; it also impacted the
share prices of the companies of Mukesh Ambani,
who controls a slightly larger share of Reliance
Group.
The price of all Reliance stocks,
including flagship Reliance Industries Ltd [RIL],
were hammered for the next two days. It was a roll
call of Indian industry - Reliance Petroleum (like
Reliance Industries a Mukesh Ambani company),
Reliance Communication [RCom], Reliance Energy,
Reliance Capital, Reliance Natural Resources and
all other Anil Ambani-managed companies shed
anywhere between 6% to 25% of their market
capitalization in the period.
"The
Reliance Power debacle has taught me to never take
the Reliance Group for granted,'' said Rajesh
Patwa, an investor. "From now on I’ll think twice
before investing in Reliance companies,
particularly in their IPOs."
Patwa was not
alone in his reaction, according to Shankar
Sharma, head of First Global Stock Broking Ltd, a
Mumbai-based stockbroker and investment banker.
"It is clear that the perception of a sort of
infallibility the Reliance Group has been created
over the years has been shattered with the debacle
of the R-PL listing," he said. "The next time, any
IPO from this group has to be priced with some
fundamental safety net."
Large
scale Like his elder brother Mukesh, Anil
Ambani does everything at an absurdly large scale.
Where his brother's Reliance Industries features
as the largest private sector enterprise in India
(and comfortably ranking in the Fortune 500 list)
with over $27 billion in revenues, Anil had to
make sure that RCom, the mobile telephony company
he controls, is the largest in its sector. If
Mukesh Ambani embarks upon building the world's
largest petroleum refinery - through Reliance
Petroleum - Anil too has to build Reliance Power
as one of the world's biggest power plants using
clean-burning natural gas.
Both brothers
have cashed in on the goodwill of Dhirubhai, who
died in 2002 after shaping India's equity culture
by attracting millions of retail investors in a
market that was then dominated by financial
institutions. Through repeated public offerings of
Reliance Industries since its IPO in 1977, none of
which went below their issue price, Dhirubhai
revolutionized the country's capital markets by
generating billions of rupees in wealth for those
who put their trust in his companies.
The
IPO of Reliance Power, which had no assets and
little cash flow to boast off, benefited from the
Reliance brand name and also the present euphoria
in India's stock markets, attracting subscriptions
for 73 times more shares than were available.
It was the first company flotation by Anil
Ambani's ADAG (Anil Dhirudbhai Ambani) Group since
he carved it out after splitting with his brother
following the death of Dhirubhai in July 2002. The
ADAG Group's five previously listed companies were
all spun off from Dhirubhai’s Reliance Empire when
his sons formally split it in January 2006.
The Reliance Power debacle is intriguing
considering the fact that barely a month back, the
announcement of the IPO had investors from around
the world scrambling to get a piece of the
company. Qualified institutional investors (read
foreign institutional investors) poured in $100
billion to oversubscribe their share of the float
by 82 times. Rich investors or high-net worth
investors (HNIs as they are called in India) who
had put in single applications worth $260,000 each
were even more aggressive, bidding for 163 times
more than the number of shares earmarked for them.
Retail investors - those who had put in $2,500
worth of applications each - oversubscribed to the
extent of around 15 times.
So what went
wrong? The debut was not helped by a souring in
global market mood as the reverberations of the US
subprime and credit crisis swept around the world.
Between January 4, when the IPO was announced, and
the listing date of February 11, the benchmark
Sensex index fell over 4,000 points, or almost
20%, from historic highs of around 20,686 points
to 16,630.91 points.
The Indian stock
market was also particularly weak on February 11,
when it fell by 8%. But that according to analyst
that was due to the Reliance Power debacle as
investors sold other shares to pay for losses
after buying the stock on borrowed money.
Some say Reliance Power's downfall was
linked to aggressive pricing of the IPO. "As we
have been warning right from the day the IPO
pricing was announced, it was too richly priced,"
said S P Tulsiyan in Mumbai. "According to our
calculations, the IPO was at least 20% overvalued
when compared with peer companies in India. For
instance, the IPO price was assigned a phenomenal
price-to-asset value ratio of 6, for a company
that does not even have a power plant on the
ground. Whereas NTPC (a local power company),
which already has as as big a project as what R-PL
proposes to set up by 2010, trades at around 3
times its present asset value."
Tulsiyan
blames this overpricing squarely on the merchant
bankers who marketed and managed the IPO, and on
the market premium in the grey, or unofficial
pre-listing, market where the stocks changed hands
at prices that encouraged many buyers of the IPO
to believe that they would easily get an immediate
return on their investment.
Critics add
that Anil along with the merchant bankers also
created hype through a pre-IPO advertising
blitzkrieg that with the slogan "Power On, India
On" tried to portray India's scorching economic
growth is solely dependent on availability of
power. Anil dismisses the allegation: "To say that
nearly 500 sophisticated institutional investors
from across the globe, and 5 million retail
investors, were all taken in by hype to an extent
that they committed a staggering $190 billion is
an unfair comment on their collective intelligence
and understanding."
Still,the Reliance
Power listing would have missed disaster had not
almost every investor who applied in the IPO done
so just to make a quick buck, according to Sharma
of First Global. "Everybody bought to flip and not
as an investment," he said . Flipping is the
practice of buying IPO shares and selling as soon
as trading begins, usually for a substantial
profit and not just for retail investors lucky
enough to get offer shares. Institutional
investors get most of the shares at the offering
price and stand to gain hugely from the practice,
particularly in a hot IPO market, when the price
of a new company often rises dramatically above
the offering price on the first day.
"This
includes everybody from the financial investors to
high net worth investors to even retail investors.
But what is very surprising is that the foreign
institutional investors who claim to have great
insight into financial markets, great modeling
skills, and global investing experience could not
pick wheat from the chaff," Sharma said.
The Reliance Power listing, debacle though
it was, of course had an upside; it made Anil
Ambani, already the world's sixth-richest man
according to the Forbes List, move a notch higher.
Rough calculations suggest that with the listing,
Anil's net worth surged $13 billion, closer to but
still about $6.4 billion below his brother
Mukesh's $51 billion net worth.
Even after
the sale, Anil holds 46.96% of Reliance Power
shares directly and 15.49% through Reliance
Energy, of which R-PL is an offshoot. The new
listing increased the market capitalization of
ADAG Group by $21.5 billion to $78.77 billion.
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