For a company which listed just a week ago, on February 11, the Reliance Power board surprised everyone on Sunday when it announced that it will meet on February 24 to consider a bonus issue.
The promoters, who hold an 89.5% stake, have excluded themselves from the proposed bonus entitlement.
They are offering you double your shares, and the price will fall to half (won’t it?). Given that the promoters own 90% of the company (45% by ADAG, and 45% by Reliance Energy) they are now saying that the public, which owned about 10% will now own about 20% (actually around 19%).
That also means the price will be adjusted downwards by that much, that’s the way the market works. More shares means lower prices.
So another drama will unfold as people tell you “first time anyone has given bonus within 15 days of listing” and all such bull. Bonuses should be from retained earnings, not like this. And bonuses hold no value in today’s day and age when your net holding is going to be valued exactly the same.
But it may benefit the individual shareholder as the price may be adjusted downwards by only 10% (since the promoters don’t benefit) and each shareholder gets 2x his shares. But you know what is likely to happen? The share price will halve. That’s the way an economic bazaar works. If people are selling x shares at Rs. 380, they will sell 2x shares for as low as Rs. 190.
I have to see how this pans out. There is no “value” here – please remember that Reliance Power was a momentum IPO, and the concept of value did not arise. The stock discounts its earning five years later by more than 20 – today we don’t give fast growing stocks 20 P/E on one years earnings, and they asked us to pay 20 on earnings after five. So let’s not really talk value. If the price reaches Rs. 50 maybe there is value, but not here. This is a momentum stock, and don’t disregard the power of momentum – the movement may still be upwards.
Disclosure: No positions.