RELIANCE POWER BONUS: RAMIFICATIONS

ADAG Group is in a damage control mode, to salvage its battered and bruised image in the minds of the investor community. Its another first of its kind, a company without any track record of production/ sales and reserves is proposing a bonus issue out of its share premium account.

Infact it is an admission of the fact by The Reliance Power management that the IPO was overpriced. Or is it a ploy to pacify the grey market brokers who supported the IPO? However, if it is a genuine move to help long term investors it is a welcome move. Things would get cleared after the board meeting on 24.02.2008.

The bonus issue could be in the ratio between 1:5 and 1:2. If the bonus issue is in the ratio of 1:5, it will reduce the promoter stake by about 1.7%, and will reduce the effective price per share to Rs.375 from the issue price of Rs.450. This will only be an eyewash, as the share had drifted down to Rs.350 last week. A bonus ratio of 1:2 would mean promoter stake dilution of 4.2% and reduction in effective price to Rs.300 per share, which seems quite reasonable.

So keep your fingers crossed till 24th February. However, if on the basis of this news the share price moves closer to Rs.450, you may consider moving out if you are not a long term investor. Long Term for this company would mean holding with a 4-5 year perspective.

As per media reports Mr. Anil Ambani has made a request to the regulator to set up an enquiry into the price rigging in the Reliance Power counter in an attempt to pull down the share price. Why is there a move for enquiry into rigging when the market falls? Why not have an enquiry into the entire issue of overpricing and the role of grey market operators in the IPO market.