Anil Ambani Looking to Make Shareholders Richer

Dangling the Carrot

By Priya Nigam

Billionaire Anil Ambani's group of companies is trying to make headway with the common investor. Reliance Energy Ltd, India's second-biggest utility, now plans to consider a share buyback, less than a week after Reliance Power’s announcement of bonus shares for non-promoter stakeholders.

Previously, on Sunday, Reliance Power (RPWL) announced a bonus issue of 3:5 shares. This means that for every 5 shares held, the company would give 3 shares for free. This offer would be for non-promoters, which excludes Chairman Anil Ambani as well as Reliance Energy, which together hold about 90% of Reliance Power.

While Reliance Power garnered a record Rs11,560 crore through its IPO, the stock plummeted on listing on February 11. Shares were not hit by any company-specific issue. Rather the global sell-off in equities hit all Indian stocks and more so new shares. So, the company decided to give away free shares to boost investor confidence. Of course, this would benefit shareholders, especially because it brings down the cost of acquisition. (This is how. Say you bought 5 shares of Reliance Power at Rs430 per share. It means you spent Rs2,150 in total. But after the bonus issue you own 8 shares. So, per share you have spent Rs269. This is 40% below the IPO price). At the same time a bonus issue is also good for the company, since it issues the extra shares from its accumulated reserves. So, unlike a dividend payout, a bonus issue can be given without causing a dent in the company’s profits.

Anil Ambani has agreed to transfer 2.6% of his personal stake in Reliance Power to Reliance Energy, so that the latter company’s stake in the former remains unchanged at 45%. Following the bonus issue, Anil Ambani’s personal stake in Reliance Power has been diluted to 40%, from his earlier 45% stake.

In its latest move to appease investors, Reliance Energy has announced that it would consider initiating a share buyback on March 5. According to news reports, sources close to the matter have indicated that the Mumbai-based company has cash reserves in excess of Rs10,000 crore and would use a part of this (could be as much as Rs2,500 crore) for repurchasing its shares.

A bonus share issue and now a buyback… all indicators of a company’s financial health. And individual investors seem to be pleased with the bonus issue and the prospective buyback. Reliance Energy climbed nearly 5% to close at Rs1,697.25 in Mumbai trading on Tuesday. Shares hit an intraday high of Rs1,711.90. Reliance Power may have slipped during its listing, but closed above Rs450 on Tuesday. With another IPO in the offing, the Anil Dhirubhai Ambani Group must be happy with its success at wooing investors.