Reliance Power Board is meeting on 24th February, 08, to consider issue of free bonus shares, to all categories of shareholders, excluding the promoter group, which will result in reduction of the cost of Reliance Power Ltd., shares below the IPO price of Rs.430 per share for retail investors and Rs.450 per share for institutional and other categories of investors.
This move, in a way, is a admittance that the IPO was aggressively priced and response to the issue was led by factors beyond fundamentals. This has resulted in share price ruling below its offer price, even after announcement of proposed bonus.
This is definitely a desperate and unprecedented move by the management of Reliance Power, to soothe the frayed nerves of the investors. But will this work ?
Issue of bonus shares are authorized by the Articles of Association of a company and strangely no reference of the same has been made in the Companies Act. However, listing agreement, Articles of Association and Companies Act, stipulate the requirements of all issued shares to be pari – passu shares, for a listed company, which means, all the issued shares must have the same rights and obligations.
Of the 226 crore issued shares of Rs.10 each, 203.20 crore are held by the promoters and 22.80 crore shares are held by the public. So bonus under consideration, would be issued only on 22.80 crore shares
Let us see how the bonus can get implemented and analyse its effect.
If the Board approves ratio of bonus on 24th February 08, the same needs to be approved by the shareholders, in its Extraordinary General Meeting (EGM), coupled with amendments in Articles of Association for issue of bonus shares, only to non-promoters. This EGM can be held after giving 21 days clear notice, and adding about 3 days of posting and printing, it can earliest be held on 19th March. Post this, 14 days notice is required to be given to the stock exchanges, for fixing record date, to ascertain the names of shareholder, entitled to receive bonus shares, which could only be on 2nd or 3rd April 08.
Eligibility of Shareholders –
Only shareholders, holding shares on record date, would be entitled to receive bonus shares. This means, if record date has been fixed for 3rd April 08, those who are shareholders on that date, in non-promoter category, would be the only ones eligible to receive bonus shares. The original allottees, having got allotment in IPO, but have sold prior to record date, would not be eligible to receive bonus shares.
Expected Bonus Ratio –
Market is agog with rumour, speculating on the expected bonus ratio of, as liberal as 1 : 1 to 1 : 5. However, management would be keen to draw an equilibrium, between maintaining the market capitalization and soothing the nerves of the investors. If liberal bonus of 1 : 1 is issued, probably, market capitalization would take a hit and may fall below Rs.80,000 crores and if it is issued below 1 : 3, investors might not be appeased. Hence, in all probability, bonus could be in the ratio of 1 : 2 at best or 1 : 3 at worst.
Bonus implications on share price –
Due to the shattering of confidence of investors, majority of them would like to exit from the stock. On first day of listing viz. 11th February, 08, about 6.41 crore shares, put together on BSE and NSE, were marked for delivery, which is about 28% of total issue size, of net offer to the public. Conservatively, it can be assumed that till now, about 8 crore shares, may have changed hands, of original allottees, those who have exited by booking loss.
In all probability, since management is keen to have a price of Rs.450 per share, atleast, on pre-bonus basis, the share price may have strong resistance at a level beyond Rs.450 and may find it very difficult to cross Rs.500, however liberal the bonus ratio might be. Under these circumstances, if bonus ratio is presumed to be 1 : 2, (which is most likely), ex-bonus share price would be between Rs.300 to Rs.330 per share.
Promoters’ Stake Dilution –
One more section of the market and media, has been talking that promoters would distribute its own shares held, as free bonus shares, to non-promoter shareholders, which will not be the case.
The company would capitalize part of Rs.11,303 crore, collected as share premium, to issue bonus shares, as decided by its Board. Suppose 1 : 2 bonus is proposed, it would translate into a fresh issue of 11.40 crore shares, thus increasing paid-up equity of the company to 237.40 crore equity shares. Due to this, promoters’ stake would dilute form 89.91% to 85.50%. If bonus is issued in ratio of 1 : 3, the promoters’ stake would fall to 87% with paid-up equity rising to 233.60 crore shares.
Re-Rating of Power Sector ?
Will this bonus issue, re-rate the power sector ? That is not likely, as whole issue would be looked in isolation and not in conjunction with power sector valuation. Since issue was aggressively priced, it would be seen that, that mistake is now getting corrected.
Legal implications –
As discussed, merely passing a special resolution in EGM may not serve the purpose and would not comply with all the legal provisions. Even income-tax department can levy tax on deeming provision, for foregoing its claim and rights of bonus shares, by the promoter group. Also, since entire 226 crore shares of the company are listed, stock exchange may object for excluding promoters’ shares, from bonus eligibility, as all are pari-passu shares.
One has to see, how effective this damage control exercise would be, which is unprecedented in the Indian Corporate history.
