Reliance Power’s merger with RNRL will mean little to either companies. It also underlines how wrong the market can be about a stock’s value
Reliance Natural Resources (RNRL) stock plummeted 27.6% on Monday to Rs 46.4, from the previous day's closing price, followed by a further weakening on Tuesday. This follows what seemed to the market an unfavourable share-swap ratio in its merger with Reliance Power. An episode like this underlines how markets can be hugely wrong for a long stretch of time. Was the swap ratio really unfavourable?
RNRL has been trading at around Rs70 for the past few months. At its height in 8 June 2008, it traded at a price as high as Rs245. All this while RNRL has been a shell company with virtually no business, except some claimed prospects in coal-bed methane. Investors and punters were hoping that it would trade in gas and make huge money through what economists call rent-seeking. It was supposed to buy gas from Reliance and sell it to the gas-based power plants of Anil Dhirubhai Ambani Group. ADAG also showed a vague pretence to get into other resource businesses. One was cement for which it hired Anil Singhvi, former managing director of Ambuja Cement. But this was dropped after a year or so. Now comes the merger with Reliance Power which finally underlines that RNRL has no future on its own. It was born a shell and died a shell.
On Friday, the boards of RNRL and Reliance Power approved a merger. KPMG valued RNRL at Rs 7,157 crore, leading to a share-swap ratio of 4:1. The market expected a share-swap ratio of 3:1 based on the trading price of the two stocks.
RNRL had closed on Friday at Rs63.65 while Reliance Power was at Rs175.15. It was ridiculous for the market to value RNRL so highly in the first place. What begs the question is what does RNRL have by way of assets and revenues that it was valued at over Rs7,000 crore? On the other hand, didn't Reliance Power make India's largest and most-hyped public issue in January 2008 when it was a shell company but instantly entered all the major market indices and also the derivatives segment? The two are of a kind. Subsequently, Reliance Energy's power assets were shifted to Reliance Power to add some assets. Now RNRL gets erased.
The merger was the only way out for ADAG to allocate gas to Reliance Power as the government's gas-utilisation policy does not give priority to a gas-trading company like RNRL but to only actual gas users like power and fertiliser companies. This was again affirmed by the Supreme Court of India in May this year stating that the government has the right and power to set up the price and users for gas. This supposedly left no or little opportunity for RNRL which was set up five years before with the only purpose of procuring gas for Reliance Power.
The merger has salvaged RNRL at the expense of the shareholders of Reliance Power which plans to set up a huge 37,000MW capacity out of which 10,000MW of power will supposedly be generated from gas. The company is talking of setting up seven coal-fired power plants, two gas-fired units and seven hydroelectric projects.
The official reason for valuing RNRL so highly is that it has coal bed methane blocks with estimated resources of 193 billion cubic meters and an oil & gas block (RNRL holds 10% stake) with acreage of 3,619 sq km and reserve potential of up to 28 billion cubic metres. All these are currently estimates and ADAG's projections and estimates have proved to be notoriously fickle. The merger carries no synergy and erases another iffy chapter of ADAG companies.
Watch 17,900 on the Sensex for the up-move to continue
The market ended the trading session in the green on strong global cues. The Sensex settled at 17,614, up 173 points (1%). The Nifty was at 5,289, up 53 points (up 1%). The market pared early losses taking support from Asian markets, which staged an early recovery. The trend was upwardly biased, supported by a strong rally in IT and metal stocks.
Asian stocks rebounded, with regional benchmarks rising from their lowest levels in almost a month. Benchmark indices in Indonesia, Singapore, Taiwan, Japan and South Korea were up 0.5% to 1.4%. The Shanghai Composite index was up 1.9% and Hong Kong's Hang Seng was up 1.2%.
US markets were closed on Monday for the Independence Day holiday.
Back home, the monsoon has covered the entire country around nine days ahead of schedule. It advanced into key grain-producing states of Punjab and Haryana on Monday, continuing a rapid revival after falling 16% below normal in June.
HSBC said that the Reserve Bank of India (RBI) may deliver an overall 125 basis points (bps) hike in policy rates over the next 12 months with a 25 bps increase at the 27th July policy review. The RBI raised interest rates almost a month earlier than expected on Friday.
The finance ministry said that direct tax collections rose an annual 15.5% to Rs686.8 billion in the April-June period. Corporate taxes during the period rose 21.65% on the year to Rs434.4 billion.
Foreign institutional investors were net sellers of Rs220 crore in the equities segment on Monday. Domestic institutional investors offloaded stocks worth Rs51 crore.
Edserv Softsystems (down 3.4%) has decided to open its Qualified Institutional Placement (QIP) issue on 9th July. The minimum floor price for the issue has been fixed at Rs205 per share, higher than the price calculated as per SEBI (ICDR) Regulations, 2009.
Polaris Software Lab's (up 3.8%) group company, Laser Soft, has bagged a project from Andhra Pradesh State Co-operative Bank to implement core banking solutions in all its 22 district central co-operative bank branches spread across the State. The implementation will be executed through a unique multi entity CBS rebranded as 'Intellect Core Banking Solution'.
Indiaco Ventures (down 1.2%) has announced the launch of a 'Virtual VC Co-investment Fund' by community start-up funding company, Grow VC. The new co-investment fund is aimed at improving early phase funding and allowing venture capitalists to participate with a simple and cost-efficient model for finding great investment opportunities and managing multiple investments in these start-ups.
Tata Power Company (up 0.5%), along with its consortium partner Arrow Energy, has been awarded the Satpura coal bed methane (CBM) block in Madhya Pradesh during the CBM IV bidding round. The consortium had submitted bids for three CBM blocks during the bidding conducted by the Director General of Hydrocarbons (DGH) on 12 October 2009. On 24 June 2010, the Cabinet Committee on Economic Affairs (CCEA) approved award of seven CBM blocks out of 10 offered in the bidding.
Employees of Coal India and its eight subsidiaries are being ‘helped’ to open demat accounts as the company is scheduled to come out with its IPO in the next few months
In an out-of-the-box idea, Coal India Ltd (CIL), which is planning an Initial Public Offering (IPO) in the foreseeable future, is helping employees to open depository accounts to eliminate last-minute barriers to subscription. The move could possibly help the PSU get a better response to its public issue, especially since shares are expected to be offered at a 5% discount. CIL, which has an employee base of a massive 3.98 lakh, has negotiated excellent rates with various Depository Participants (DPs) including Stock Holding Corporation of India Ltd (SHCIL) and others. Some of them are offering to open the demat accounts free of charge and will also waive account maintenance charges for the first year.
Disinvestment secretary Sumit Bose, who has the tough job of ensuring successful disinvestment, says that the effort of facilitating employee participation started with the National Mineral Development Corp (NMDC) but it was unfortunately done too late. CIL has however got an early start on this effort. It has also asked the National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL) to conduct investor-education seminars to generate interest among employees.
Given the pathetic state of retail investor participation in India's capital market, the PSU effort will boost the investor population.
Madhabi Puri Buch, CEO of ICICI Securities, lauded CIL's proactive effort and said, "At the least, operational barriers should not come in the way of employees being able to subscribe to the issue. The aggregation of demand had helped the company negotiate excellent terms for its employees with various market intermediaries. Also, if CIL planned to offer stock options in the future, the demat accounts would make the process easier." While the employees would ultimately decide whether they want to open an account or invest in the company shares, even a small conversion of the employee population would be a big boost. Whether it actually leads to a big boost in subscriptions remains to be seen.
According to a senior official from CIL, who did not wish to be quoted, the company had received about 36 proposals from various depository participants and banks, including the ones with which they have their salary account, for opening demat accounts for its employees. "We have not mandated anyone to open demat accounts for our employees. We are just helping out our employees in the process and it is completely up to them (the employees) where they want to open their demat accounts," the official added.
Despite economic prosperity and multiplying 24-hour business channels, retail investors are staying out of IPOs, mutual funds and pension funds-gypped by self-serving intermediaries and irritated by cumbersome rules of unaccountable regulators. According to a report by the Swarup Committee, out of India's 188 million investors holding financial assets, only 8 million participate in the debt and equity market, including mutual fund and market-linked insurance products. (see: http://www.suchetadalal.com/?id=6653aa01-572c-d539-4b865e30293d&base=sections&f).
This had led to poor response by retail investors to many IPOs or follow-on public offers (FPOs). Earlier this year, National Thermal Power Corporation (NTPC) managed to get a subscription of 1.2 times for its FPO with a retail participation of just 16% of the total 42.8 million shares reserved for the retail investors' category. For its total shares on offer, NTPC received a dismal 80,000 applications from retail investors all over the country. In order to avoid such a fiasco, the government is now resorting to some out-of-the-box methods like helping employees to open demat account so that they can subscribe to IPOs and FPOs of PSUs.
With a growing number of corporates tapping the capital markets, equity-raising rose to $23 billion in 2009 compared with $14 billion the previous year. In 2010, issuances have already crossed $15 billion. With the government proposing that listed companies would have to reach a minimum 25% level by an annual addition of not less than 5% to public holdings, there could be a further increase in capital raisings.
According to an estimate by Citi India, about $30 billion of capital would be required to be raised by BSE 500 companies, of which $26 billion is in the PSU space and the remaining in the private space. "While there are concerns that public offers would crowd out liquidity for genuine borrowers, an offset could be India's high savings rate, which is primarily held by the household sector. Moreover, savings in equity markets stood at 3.8% of total financial savings in FY09, suggesting potential for growth," said Rohini Malkani, economist, Citi India, in a report.
State-run CIL is coming out with its IPO in the next few months and is busy preparing its draft red herring prospectus (DRHP). The Union government is divesting its 10% stake in Coal India through a 100% book-building process in domestic markets.
Around 3.98 lakh employees of CIL and its eight subsidiaries will be offered 1% of the total equity. These employees will also get a 5% concession in the IPO to become stakeholders in the company. This not only prompted the employees but also some depository participants and banks to rush for opening demat accounts.
CIL, which is engaged in the production and marketing of coal and coal products, has a paid-up equity capital of Rs6,316.36 crore. According to media reports, CIL's IPO is likely to come to the market by end-September and its valuation will be decided by the group of ministers.
Last month, the Cabinet Committee on Economic Affairs also decided to allow 5% price concession to retail investors in order to encourage greater public ownership of public sector companies. The government has also approved divestment in Hindustan Copper Ltd. At present, the government holds 99.59% stake in Hindustan Copper and 0.57% shares in the divestment will be reserved for employees. After disinvestment, the government stake in CIL will come down to 90% and in Hindustan Copper to 81.44% and the government's kitty will go up by about Rs16,000 crore.
In May, the government announced measures to streamline and speed up the process of divesting stake in public sector units, in order to meet the Rs40,000-crore target from disinvestment proceeds in FY11. So far, the government has raised Rs1,000 crore from its divestment in Satluj Jal Vidyut Nigam Ltd in this fiscal.
The department of disinvestment is already working on the disinvestment of two other large State-run units, including Engineer's India Ltd and Steel Authority of India Ltd (SAIL), which are expected to hit the market in the next few months.
About six other public sector enterprises including Indian Oil Corp (IOC), MMTC Ltd, Rashtriya Ispat Nigam Ltd (RINL), Shipping Corp of India Ltd (SCI), Power Grid Corp of India Ltd and Manganese Ore (India) Ltd are also on the government's disinvestment programme for the year.