Bonus power

Reliance Power has achieved its initial objective, of boosting the company's share price somewhat by announcing a bonus issue whose ratio remains unknown till the week-end. By making the announcement, the company has also sought to undo some of the reputational damage caused by the shareholder disillusionment (and worse) that must have set in once the company's over-priced shares tanked on listing. But if the company's intention is merely to close the gap between the current market price and the issue price, then the bonus share ratio is unlikely to be generous. Perhaps more importantly, what should be noted is that even today's market price probably makes the company over-valued by the yardsticks that prevail in the rest of the power sector. In any case, since the promoters have got shares in Reliance Power at Rs 17, compared with Rs 450 and Rs 430 that were the two IPO prices, no bonus share issue can really level the field.

There are some operational aspects to the bonus announcement that merit attention. For instance, it has been announced that Reliance Power's bonus issue will not be offered to the company's promoters, among which must be counted Reliance Energy. However, Reliance Energy's shareholders have not been consulted about this generosity on their behalf, and some of them may feel they have a fresh grievance "" the original grievance being that the company's projects were given away to Reliance Power. There is also the technical point that all shares in a company have to be treated as pari passu, a company cannot discriminate between one shareholder and another "" which is what the announcement with regard to promoters' bonus shares seeks to do by stating that only some shareholders will qualify. If, instead, the argument is that all shareholders qualify for the bonus but the promoters voluntarily gift back their bonus shares, that raises some tax questions.

It is possible that the company has answers to these questions, which shareholders will be eager to hear. Meanwhile, many of the people who subscribed to the Reliance Power IPO have already sold their shares (note that the trading volume in Reliance Power was huge immediately after listing, so a lot of shares changed hands). Therefore, if the bonus issue is meant to compensate those who had subscribed to the IPO and then lost money, that cannot be done unless the record date for the bonus issue is made retrospective and taken to be the listing date. This however is not allowed, as the record date has to be prospective.

Some of the questions relate not to the share price fall and the compensatory bonus but the company's ability to execute the projects it has on its hands. This is something on which only time can provide the answers. At the present juncture, all that can be said is that the Reliance Power IPO will go down in Indian capital market history as the final act of excess that marked the turning point when the bull market ended.