Archive for the 'IPO' Category

08
Mar
08

Reliance Power IPO

FROM BEING THE MARKET’S DARLING TO A PARIAH

RelPow IPO

RelPow IPO

Let us look at the facts first. It was India’s largest initial public offer ever and hoped to mop up Rs.11,700 crores, which is about Rs.2,500 crores more than the largest IPO to date in India floated by real estate giant DLF. It had the best of the business as the lead bankers in the form of ABN Amro Rothschild, Deutsche Bank AG, Enam Securities, ICICI Securities, JM Financial Consultants Pvt, JPMorgan Chase & Co, Kotak Mahindra Capital Co and UBS AG.

Investors also gave it a two-thumbs up as they bid for as many as 72 times the number of shares that Reliance Power offered for subscription under its initial public offering (IPO). They have put in bids for over 1,654.8 crore shares as against the 22.8 crore shares on offer.

In terms of number of applications also Reliance Power IPO set a new record. It received nearly 31 lakh applications by the end of day three, the highest ever, according sources in the merchant banking industry handling the IPO. Valuation of the Reliance Power IPO seemed to be riding on the positive sentiment for the power sector. But there was also some concern about the pricing yet the retail investor blatantly subscribed the upper end of the price band.

So all in all the book building process was a very satisfying one for Mr. Anil Dhirubhai Ambani, who could hardly contain his happiness at the end of it all and vehemently claimed to be the messiah of investor confidence and trust.
But the market euphoria soon ended and the Sensex tanked more than 1400 points on January 21st, 2008, just three days after the book-building process for the R-Power issue ended.

Everyone, from Mr.Anil Ambani to the average retail investor could not see any relief in sight and the market kept wondering as to when the scrip would actually be listed.

At the same time, the situation left a lot of grey market operators fretting. A dispute had broken out among traders in the grey market, where deals had been entered into even before the issue’s price band had been fixed.

Market watchers said the situation had arisen following the company’s decision to float the shares at a face value of Rs 10 instead of Rs 2 as announced earlier.

A section of grey market operators, which had short sold Reliance Power shares in the grey market, and were, staring at potentially huge losses, used this development as a pretext to renege on their commitments. Technically, if there is a change in the face value of a share, the premium or discount will change to reflect the new face value. Also, the volatile market conditions further exacerbated the situation with no one knowing the fate of the scrip.

Transactions in the grey market are done purely on the basis of trust and there are no documents because the activity – though widely prevalent – is outlawed in the first place.

While the issue had been delayed, the premium in the grey market had been steadily on the rise. As a result a lot of grey market players had run up significant losses.

Interestingly, Reliance Power was the first instance of an IPO being traded in the grey market even before the price band had been fixed. Premium or discount in the grey market is linked to the price band. But in the case of Reliance Power, it was the purely the premium that was being traded.

“This (grey) market operates purely on faith and if that is broken, people will be wary of entering into deals,” said a broker who arranged transactions in the grey market. The deals are entered into verbally, and the shares change hands on the trading screen once they are listed. So what was the reason that the thug and the saint both believed in the Reliance Power IPO story alike?




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