The Hindu Business Line : Power play

The Reliance Power promoters may have, for now, alleviated the investors’ financial distress post the stock’s listing. But there are still risks ahead.

At one level, the decision of the Reliance Power management to issue bonus shares to minority shareholders could be viewed as one dictated by considerations of expediency. After all, a promoter cannot afford to lose credibility with investors especially if there are intentions to raise money again. And a steep decline in shareholder wealth, that too within days of a stock’s listing, is perhaps the surest way to put investors off. It is no secret that Reliance Power p romoters have lined up ambitious plans in telecom and other infrastructure sectors, which would doubtless involve access to public funds. On the one hand, it could equally have been, as Mr Anil Ambani claims, motivated by a desire to alleviate in some measure the financial distress experienced by investors after the dramatic erosion in the market value of their investments in Reliance Power. Either way, the development is a welcome contrast to the innumerable instances of promoters raising money from the public and disappearing without a trace.

The promoters may have, for the present, managed a situation that severely dented their credibility with a solution that is historic in many ways. But Mr Ambani would perhaps be the first to concede that this does nothing to stave off a larger risk, namely, the timely execution of the many projects that the funds mobilised through the public issue are meant to finance. The power sector, to which these funds are committed, is notorious for delayed execution for reasons such as slippages in equipment supplies, absence of fuel linkage or environmental clearances. Indeed, the market valuation could be affected in the days ahead by concerns, real or imaginary, on any of these factors. The company cannot possibly employ the ‘bonus share’ tactic every time the share price is buffeted by these fears. It will have to reckon with such price-sensitive developments till at least the first of the numerous projects goes on stream.

Unfortunate as the travails of Reliance Power’s retail investors are, they do not still make a case for bringing back some kind of control over the pricing of primary market offerings. For one, the earlier system severely eroded price discovery and was nothing but a thinly disguised attempt at wealth transfer from incumbent shareholders to fresh investors in the company’s shares. It had impeded capital formation in the economy then, and could do so now as well. In any case, such controls can work only if there are attendant restrictions on companies accessing capital abroad. The economy cannot have a competitive market for goods but not for capital. In other words, the very fabric of economic liberalisation ushered in since the early 1990s will have to be discarded. A safer course of action would be investor education that emphasises the perils of leveraged investing driven purely by considerations of listing gains from over-hyped primary offerings.

Related Stories:
3:5 bonus from Reliance Power; effective price will be Rs 269
Legal, tax aspects of RPower bonus announcement
Reliance Power proposes bonus shares to non-promoters