Reliance Power Results: invests money in Mutual Funds

There is some news for the shareholders of Reliance Power shares. In the recently reported results by the Reliance Power Company, it reported that more than 98% of the money raised through the Reliance Power IPO has been invested in Mutual Funds.

Now I don’t know what to say – whether it is a good investment or a bad investment. Good, because investments in mutual funds have helped the Reliance Power company earn a profit of around 94 Crore Rs. Bad, because this is how the investors money is betted upon. Is this what investors have given the money to the Reliance Power Management for?

Interestingly, Reliance Power has not revealed which mutual funds the money has been invested. So, investors are completely blind about whether their invested money has been betted upon infrastructure related funds, or growing economy funds, or simply put into bonds based funds.

Through the IPO, a total of 11,562 Crores were raised. Out of which, 11412.81 Crores were invested in Mutual funds. That’s exactly 98.8% of the money. On this investment, the company managed to get a net return of 94.6 Crores. That’s a meager return of just 0.83%. What more can you expect from a Zero Watt Power Company, which is expected to produce real power only after 3 to 5 years. It is we investors who betted upon this stock.

The IPO offer document says that the company “intends to invest the funds from the issue in interest bearing liquid instruments including deposits with banks and investments in mutual funds. These investments may include investments in mutual funds managed or financial products sold by one of our affiliates, RCL (Reliance Capital).”

As per the news, The company has spent only Rs 25.83 crore as of March 31, 2008 in construction and development of its various projects. That’s a mere 0.22% of the IPO money actually invested.

Let’s see when actually this company produces real power and when will the investors be able to get the returns on investments. Fortunately, the book closure and record dates for the allotment date for Reliance Power Bonus shares have been finalized! (Click to know the dates). So investors can now expect to receive the bonus shares.

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Reliance Power Bonus Issue Allotment Date

Hundreds of Reliance Power Share owners are waiting for the Reliance Power Bonus issue.
After the hopeless listing of the Reliance Power Shares, the company had declared bonus shares in the ratio of 5:3, i.e., anyone holding 5 shares of Reliance Power, will be given 3 extra shares as bonus shares without any cost. This allotment will be done only to non-promoters and the promoters will absorb the loss.

Related: Reliance Power IPO Review & Reliance Power IPO Complains & Price Calculations and Adjustments for Bonus issue

Finally, the much awaited news for Reliance Power Bonus issue allotment date has arrived.

As per the news, Reliance Power Limited today announced date of closure of its Register of Members from Tuesday, June 3, 2008 to Thursday, June 5, 2008 for the purpose of determining the entitlement of shareholders to the Bonus shares to be issued by the Company.

As approved by the shareholders of the Company, Reliance Power will issue Bonus shares in the ratio of three new equity shares of Rs 10 each for every five existing equity shares of Rs 10 each held, to the public shareholders of the Company.

The bonus shares will be issued to those shareholders whose names appear in the Register of Members as at the end of the close of business hours on Monday, June 2, 2008.

And what have the Reliance Power management done with the money raised through the Reliance Power IPO? They have invested it into Mutual funds. Interesting!

Still more than a month to go….don’t expect any miracles and sudden jump in prices.

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Reliance Power Bonus Shares: Price Calculations for 5:3 issue

After explaining the mathematics of Bonus issue of Reliance Power shares in my article Truth of Reliance Power issuing Bonus Shares, here are the final and exact numbers and calculations as Anil Ambani has finally declared the exact figures about the Bonus Issue of Reliance Power.
Each Non-Promoter (including Retail Investors, and QIB investors) will receive 3 shares for every 5 shares they hold. Hence, if any retail investor has 15 shares and he is still holding it, then he will receive 9 additional shares as bonus shares, at no extra cost or free of cost.

So what will be the effective price of the retail investors’ shares?
Retail investors were offered shares at 430. Someone receiving 15 shares would have paid 15*430 = 6450 Rs. in total. Now, he will receive 9 more additional shares as bonus, without any extra cost. Therefore, at the same price of 6450, his share holding will increase to 24 shares. Therefore, his effective price will become 6450/24 = 268.75 Rs. only, for each share. Hence, the investors will benefit because the market price of Reliance Power shares is currently trading above 400 Rs.

What about QIB?
The other investors were allotted the shares of Reliance Power at a Price of Rs. 450. Hence, for 15 shares they paid 450 * 15 = 6750. After Bonus Issue of Reliance Power, the no. of shares will increase to 24. Hence, their effective price will become 281.25 Rs per share. Again beneficial, as the stock price of Reliance Power is around 400 Rs.

All in all, it’s a good move by Reliance Power Promoters. Anil Ambani himself have divested his holdings in Reliance Energy and Reliance Power to absorb the losses. I hope this loss bearing by the promoters will give good strength to the share price and benefit to the shareholders. It should also help in marinating the Reliance brand, as a reliable name in India and the world.

Related: Reliance Power Bonus Shares Allotment Date

Another example of Randomness can be observed. The REC or Rural Electrification Corp. IPO was oversubscribed well above its limits.

Hardly 15 days back a well dominated and reliable name of Reliance in the same power sector failed, Emaar MGF and Wockhardt hospitals IPO were cancelled, but an unknown and new company with REC IPO have managed to win the hearts and trust of investors. Keep, watching, things work randomly!

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Truth of Reliance Power issuing Bonus Shares: Heal-up process

Anil Dhirubhai Ambani group controlled and recently floated Reliance Power company is now willing to offer Bonus share to the shareholders as a part of image building process. The bonus shares will be given only to the investors and shareholders other than the promoters. Hence, each shareholder will get an additional share for each share of Reliance Power that he is holding. If someone has 15 shares, then his shares will double to 30.

But what’s the catch?
As explained in this article,Issuing Bonus shares does not really add any value to the company. That’s a fact. Because, just by increasing the number of shares, the company does not creat any value or any new business.

Typically, what happens is as follows. If say I run a company which has a total of 100 shares and the price of each share is 2000 Rs. Now If I decide to go for a bonus share in the ratio of 1:1, then each shareholder will get another additional share. Hence, the total no. of shares will become 200. However, the Markets are efficient, so the price of the share will automatically adjust to half, i.e. it will come down to Rs. 1000 only.

In simple ways, initially, before the bonus issue, the total value of the company was 100 shares * 2000 Rs = 200,000 Rs. So just by giving a bonus share, the company has NOT created any value. Therefore, after the bonus issue, the market price will come down, so that the total value of the company will remain the same.

After the bonus issue, the no. of shares will be 200, so for the Market capitalization of the company to remain the same at 200,000, the share price will come down to 1000 Rs. No value is created. However, since the price has come down to 1000 Rs. level, there is some liquidity in the market. Now more people can purchase the share as the price has come to a bit lower level, hence there is liquidity induced. Generally, this is taken as a positive sign by the market, hence the price of shares usually increases.

How is Reliance Power Bonus Shares Issue different?
The Reliance Power Bonus issue is different because it is not applicable to the promoters. Therefore, the additional shares will be given only to other shareholders. The proposal will result in a dilution of the promoter group's shareholding (89.9 per cent at present) in R-Power.

So for an example, if the promoters hold 90% of the shares, then only 10% are there with other share holders. Therefore, if Reliance Power has a total of 100 shares, then 90 belong to promoters, rest 10 belong to other shareholders. These 10 shares will be doubled –taking the total no. of share to 110. Hence, the price will adjust accordingly.

For example, if Reliance Power is trading at 350, then the value of the company with 100 shares is 35,000. After bonus share issue, the total no. of shares have become 110. Therefore the share price will go to 35,000/110 = 318.18

Now, the 10% shareholders will benefit because they will have 2 shares at the price of 350, hence the effective cost will be 175 per share. And after the bonus share issue, the market price of each of the share is 318.18, therefore, the 10% stock holders will gain.

Who will loose? It’s the promoters that will absorb this loss – who hold the 90% shares.

In Conclusion:
It’s a good move by the promoters of Reliance Power Share to offer a Bonus share issue.

Related: Reliance Power Bonus Shares Allotment Date

The retail investors can gain, but only if the stock does not show more volatility. Please not that the numbers shown above are only for demonstration purpose. The actual value will be different depending upon what was the closing price during the record date and ex-date for the bonus issue.

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