Reliance power IPO: A bird’s eye of the financial engineering with emphasis on the agency relationship.
By R Balachandran. Section D.
The company we know as Reliance power today was started in January of 1995 as Bawana Power Private Limited. It was rechristened several times and was finally named as Reliance Power Limited in july 2007.
The company has plans to develop 4 coal fired, 2 gas fired and 4 hydroelectric power plants whose completion dates range from December 2009 to March 2014.
Prior to the mega IPO of Reliance Energy Generation Limited, as it was called then, had shareholders fund of roughly Rs. 200 Crores according to its balance sheet and total equities of roughly Rs 201 Crores.
At this point the company drew aggressive plans for the next 8 years and planned a series of power plans as mentioned above. The next step was to raise funds for all those plants. Anil Ambani renamed the company as Reliance Power Limited and sold 10% of the to investors company for Rs 10500 Crores via the biggest IPO India has ever seen. It may be noted that 10% stake of the company whose assets were just 201 Crores were sold for Rs 10500 Crores on the basis of the elaborate plans developed. The remaining 90 percent ownership remained with Reliance Energy Limited and Mr. Anil Ambani (45% each) and just 10% with investors who subscribed to the IPO.
Post IPO, the shareholders funds were roughly Rs. 13500 Crores of which Rs. 10500 Crores were raised from investors who got 10% of Reliance Power. This clearly defies logic and reason. The investors ought to have a got a substantially higher stake in the post IPO Reliance Power.
During IPO Reliance Power shares were sold for Rs 450 each. At that time market was bullish and analysts had predicted that shares would reach Rs. 650. Mr. Ambani holding 45% directly and more through Reliance Energy Limited would have become India’s richest man had the shares crossed Rs. 650. But unfortunately that never happened. In any case this analysis encourages speculation on the real reason behind the IPO.
Upon listing price of Reliance Power share price dropped 17% by end of trading on listing day. The fall continued a few days. As a stopgap arrangement, Reliance Power issued a bonus to the IPO investors 3 shares for each 5 shares they had. This brought down the cost of Reliance Power shares to IPO investors to Rs 269 from Rs 450. This move was completely arbitrary. If the real worth was Rs 269, then IPO should have been priced at Rs 269.
45% of Reliance Power belonged to Reliance Energy Limited. The bonus issue would have degraded the worth of the Reliance Energy Limited’s investment in Reliance Power, which would have degraded the worth of REL shares. Mr. Anil Ambani acted in the best interests of Reliance Power at the expense of REL’s shareholders. This is clearly an agency problem. To compensate for this and avoid lawsuits, he compensated REL’s shareholders with 2.5% stake in Reliance Power from his personal holding in the later. This move again was totally arbitrary.
In conclusion, it is obvious that the whole exercise enriched Mr. Ambani at the expense of Reliance Energy Limited and Reliance Power’s shareholders.
The gas-fired plants of the Reliance Power’s mega plans depended on gas supplied from KG Basin. The agreement for KG basin gas was drawn before the famous Anil Ambani –Mukesh Ambani spat. The price of gas decided at that point was Rs. 2.5 per MBTU. Post spat, the KG-basin went to Mukesh Ambani. The viability of the gas-powered plants depended on this pricing. But now Mukesh Ambani is unwilling to sell gas at that price. It may be noted that the market price of gas internationally is at Rs. 12 per MBTU.
The lawsuits that have currently surfaced for the gas pricing, further degrades the value of Reliance Power shares affecting shareholders.
