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Market Watch: Operation Bonus

india Updated: Feb 22, 2008 22:59 IST

I wouldn't want to be in Anil Ambani's shoes this weekend. Having spent the last bullet in his gun to support the sagging Reliance Power stock, he must now be wondering what is good enough. The fact that the stock hasn't exactly zoomed post announcement perhaps indicates that the market has no lofty notions of what the ex bonus price would be. It's slightly complicated, so let me explain.

This is an unusual bonus in the sense that it is being issued to only 10% of the shareholding. Therefore, one contention could be that in case of a 1:1 bonus, hypothetically speaking, assuming a current market price of around 425 the ex bonus price should be 386 and not 212.5. Arithmetically yes but I seriously doubt that will be the case. In fact, I would be surprised if the ex bonus price doesn't veer close to the normal scenario : ie halves if it is 1:1 or becomes two third if it is 1:2. This because the "operative" part of the equity in this case is the non promoter holding and that should be the basis of determining the ex bonus price, at least in the market's eyes. If that were not the case, why hasn't the Reliance power stock shot to 600? Surely people have worked the math on the potential arbitrage. I suspect they may have come to the conclusion that a) there is a long line of people waiting to exit if the stock trades between 450 and 500 and b) the ex bonus price would hover between 300 and 350, whatever the bonus ratio. I think Reliance Power will command a lower market capitalisation ex bonus, perhaps deservedly so.

The other aspect is the ratio itself. While investors are talking about 1:1, Anil Ambani will be stretched to hand that out. It may take the stock to 500 in the near term but could be seen as a tacit admission that 225 is the real value of the stock and could even set the stage for an ex bonus price of 250,

which wouldn't please the promoters one bit. 1:2 is possible. That may take the stock closer to 450-480 in the near term and lead to an ex bonus of say 330 odd which is the low the stock saw post listing. Anything southward of that is setting the stock up for a selloff. It's a bit of a Hobson's choice. There's another lesson there : in bull markets, clever financial engineering does end up augmenting value of businesses but once you get on the wrong side of investors, such moves are seen only with skepticism and scorn. Here's some humble advice for Mr Ambani from a much smaller individual : admit, atone, learn, move on. Don't compound your errors my friend, you have a much longer innings ahead.

Executive Editor, CNBC-TV18