Desperate situations call for desperate moves. Had the Reliance power stock continued to languish below 400, a few things would have happened. Investor confidence in the ADAG group would have got seriously dented and all subsequent capital raising plans would have faced difficulty.
Valuations would have to be really attractive for investors to bite after the debacle of the current IPO. So, something had to be done to assuage hurt feelings and out came a bonus. Sadly, a large number of HNI and retail investors have already booked losses on listing day and to them this bonus won't matter. If anything , it would make them even angrier.
So, what does this bonus do to existing investors? It certainly opens up a nice arbitrage window for them. If the bonus ratio is around 1:2, better still 1:1, they could wait till the bonus shares come and sell after the stock goes ex bonus.
There are gains to be made here and also some tax planning advantages around the bonus. Reliance Power has cleverly ensured that the supply of stock is stopped for the moment, as it does not make any sense to sell now ahead of the bonus. So a technical cushion has been created around the stock. However, my sense is that investors will approach this with the aim of scalping the arbitrage. Fundamentally, nothing changes for the Reliance Power stock. Revenues and earnings are still years away and even if the stock stabilises around Rs 350 ex-bonus, it would appear overpriced relative to large peers like NTPC.
Investors also know now that even the promoters don't think that Rs 450 is fair price for the stock. The bonus is tacit admission of the fact. We are essentially back to square one : investors approached the IPO with the sole intention of flipping on listing and now they will approach it to flip after it goes ex-bonus. Anil Ambani will need to pull more rabbits out of his hat to keep the stock floating anywhere close to the issue price.
(Udayan Mukherjee is an Executive Editor, CNBC-TV18)