How much does each group of Reliance Power shareholders and promoters stand to gain from the bonus issue? Is Anil Ambani really taking a hit? By Vivek Sharma

An over-hyped IPO, a disastrous listing, a curious bonus issue and a 'personal sacrifice' of Rs5,000 crore by the promoter - the early days of Reliance Power have witnessed high corporate drama.

True to the Anil Ambani Group's penchant for achieving 'unprecedented' feats, the company has already notched up many achievements in its short life so far. The biggest ever IPO that generated an unprecedented investor demand of Rs7.5-lakh crore… the most valuable company in the power sector and one of the most valuable private sector entities even before it has begun generating a single rupee in operating revenues - it has been quite an amazing journey indeed!

The frequent bailouts of financial markets by the US Fed are often described as a 'Greenspan Put' and more recently a 'Bernanke Put'. RBI governors do not want to be seen as accommodative of market sentiments and we are yet to see a 'Reddy Put'. As if to compensate for such lack of excitement, we now have an 'Ambani Put' with all the associated concerns of 'moral hazard' and setting dangerous precedents. The Reliance Power bonus proposal and the decision by Anil Ambani to voluntarily transfer part of his stake in Reliance Power to Reliance Energy are unprecedented.

So, who all are gaining from the Ambani Put?

Minority shareholders escape unhurt
Non-promoter shareholding in Reliance Power before the bonus shares are issued is slightly over 10 per cent and will increase to more than 15 per cent after the bonus. The average share price of Reliance Power was around Rs350 per share during the week it got listed, and it may be taken as a fair market price if the bonus was not announced. At that price, the pre-bonus stake of minority shareholders was valued at close to Rs8,000 crore.

The share price settled at Rs450 yesterday and, considering the modest dilution from the bonus issue, the post-bonus price should be theoretically around Rs425 per share. That is assuming the markets will remain at the same level. At that price, the post-bonus stake of minority shareholders will be valued at close to Rs15,500 crore.

Now, the total cost to minority shareholders - retail and institutional combined - is slightly over Rs10,000 crore. So, if the post-bonus market price holds around Rs425 per share, minority shareholders stand to gain Rs5,500 crore or more than 50 per cent on their investment.

But, the IPO cost of minority shareholders is irrelevant as it is a 'sunk cost' in accounting terms. What is more relevant is the market price of Rs350, which these shareholders would have realised, if no bonus were announced. From that level, minority investors will gain as much as Rs7,500 crore if the post-bonus price settles at Rs425.

Who among the minority investors will gain most - domestic retail investors, domestic institutions or FIIs? Assuming that the post-IPO shareholding pattern of Reliance Energy has not changed substantially, FIIs will take home nearly Rs3,500 crore out of the Rs7,500 crore in gains detailed earlier. Retail investors, who will hold 5 per cent of the post-bonus capital as against an FII holding of nearly 7 per cent, stand to gain almost Rs2,500 crore. Domestic institutions and HNI's will take the rest.

Reliance Energy's jackpot
Reliance Energy is one of the promoters of Reliance Power, along with Anil Ambani's AAA Project Ventures. These two promoter entities held equal stakes of close to 45 per cent each in Reliance Power's post-IPO share capital. After the proposed bonus, Reliance Energy's stake in Reliance Power would have declined as the bonus shares have been proposed only to non-promoters.

This issue had kicked up some dust last week as non-promoter shareholders of Reliance Energy were not consulted before the decision to forego the bonus shares from Reliance Power was taken. It is possible that this decision could have been legally challenged by any of the minority shareholders of Reliance Energy.

Anil Ambani obviously wants to avoid more controversies and is making a voluntary contribution of 2.6 per cent of his shareholding in the company to Reliance Energy. This is being done to compensate Reliance Energy from any decline in its shareholding. Quite clearly, the decision is an afterthought and targeted at avoiding further criticism and legal challenges.

Even then, Reliance Energy shareholders have no reason to complain. The decision to hive-off the new power generation ventures to Reliance Power and then cede half of the latter's ownership to the promoter group was definitely not an exemplary case of corporate governance and protection of minority shareholder rights. But, if the proof of the pudding is in the eating, Reliance Energy shareholders should be a happy lot. If Reliance Energy had kept all the new projects to itself, the 'value unlocking' would not have happened.

Look at Tata Power, which also has large projects in the pipeline, but has not separated them to another company. The increase in Tata Power shareholder wealth over the last year is nothing when compared to the mega gains of Reliance Energy shareholders. The whole of Tata Power, with all its existing operations and future projects, is now valued at less than Rs30,000 crore, or just a third of Reliance Power!

So, thanks to the promoters and their merchant bankers who are the modern day alchemists who can dream up billion-dollar businesses from thin air, we now have this power sector behemoth called Reliance Power with a market value close to Rs1 lakh crore. Reliance Energy shareholders own 45 per cent of that, the value of which is probably more than the potential value appreciation if the company had kept all the projects to itself.

So, how much will Reliance Energy gain from the 'personal contribution' by Anil Ambani? Reliance Energy will receive nearly 6.15 crore shares from Ambani and will retain a stake of close to 45 per cent in Reliance Power. Its pre-bonus stake was valued at over Rs35,000 crore at the average market price of Rs350 per share of Reliance Power - before the bonus announcement. At the theoretical post-bonus price of Rs425 per share, Reliance Energy's stake will be valued at over Rs45,000 crore. That is a net gain of over Rs10,000 crore for a company which was valued at less than Rs20,000 crore early last year!

Anil Ambani's 'personal contribution'
Anil Ambani's decision to gift a part of his stake in Reliance Power to Reliance Energy is indeed a masterstroke. With this one decision, he has regained the aura of Ambani magic among retail investors. Like an editorial in a prominent business daily said, "in taking the hit personally, Mr Ambani has come out smelling of roses".

That is the perception, but is he actually taking a hit?

Before the bonus and the 'personal contribution', Anil Ambani held a 45 per cent stake in Reliance Power. At the average pre-bonus market price of Rs350, his stake was valued at over Rs35,000 crore. After the proposed bonus, his stake will decline to slightly below 40 per cent. At the theoretical post-bonus market price of Rs425 per share, his stake will be valued at over Rs40,000 crore. That is actually a gain of over Rs5,000 crore!

That is not all. Anil Ambani's stake in Reliance Energy, which stands to gain over Rs10,000 crore from the Reliance Power bonus and his gift, is close to 35 per cent. That means, Anil Ambani will notch up an indirect gain of Rs3,500 crore from the value appreciation in Reliance Energy!

So, all in all, Anil Ambani stands to actually gain over Rs8,500 crore. With this 'personal contribution' he has also ensured that future IPO's from his group companies will be received well [His Reliance Infratel has filed a Red Herring prospectus for an IPO (See: Reliance Communications' subsidiary Infratel files Red Herring draft with SEBI)]. And that will help him add many more billions of dollars to his net worth in future!