January 16th, 2008 
Tejinder Tuesday, 15 January 2008, 9.55AM: The Anil Ambani-controlled Reliance -Power opens for stock subscription in the Rs 405-Rs 450 range. 9.56 am: History is created – the stock is oversubscribed.
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By evening the Rs 11,600crore issue is oversubscribed a staggering 10.55 times. And it’s still three days to go before subscriptions close. Reliance Power is by far the largest initial public offering ever in India, dwarfing realty major DLF‘s Rs 9,188-crore issue.
Reliance Power, when it lists on the stock exchange, is likely to substantially raise Anil’s personal wealth. If the stock lists above Rs 700, as it is widely expected to do, it would catapult Anil to the top of India’s rich league, well past elder brother Mukesh’s Rs 2.48 lakh crore net worth.
But there’s more to the share issue than that. Reliance Power is representative of a whole a new league of mega public offerings in India. The DLF offering was considered a paradigm-changing one. Within seven months, Reliance Power makes it seem like a drop in the ocean.
Waiting in the wings is Bharat Sanchar Nigam Ltd. The telecom major’s initial public offering of Rs 40,000 crore – for a mere 10 per cent of the company – is set to make Anil’s stock issue look like small change.
Meanwhile, State Bank of India is planning to issue shares worth Rs 16.700 crore to existing shareholders at a fixed price. This too, will dwarf Reliance Power’s issue. No wonder then. Union Finance Minister P. Chidambaram couldn’t contain his elation. “It is a reflection of what the world community thinks about the future of India….” he said about Reliance Power, the first time he has commented on a public issue.
Other mega issues expected soon are Reliance Infocomm, Oil India, UTI Mutual Fund, National Hydro Power Corporation and Rural Electric Corporation.
The Reliance Power issue was oversubscribed several times on day one, an event that should not have surprised anyone. While one would genuinely like to believe the Finance Minister’s inference that it is an endorsement of India’s growth story, unfortunately, it is more about riding the hype to make a quick buck. It may sound less lofty, but it is the truth.
The big carrot is the grey market price. In fact, more people may be aware of the grey market premium of Rs 400 than the issue price itself, such is the hype around the expected listing. There is an air of certainty about the listing price, almost a “guarantee” that nothing can go wrong. I hope nothing does. Nothing should, for pure retail applicants. They do not borrow to invest, so there is little price risk. Even if the stock does not go to Rs 1,000 as some people expect, I find it difficult to see how it will not list at a fairly substantial premium. Thus the quantum of profit may vary but there is little risk. For the rich investor, though, who is either putting in fully funded or partly funded applications, the exact listing price and quantum of oversubscription and hence allotment determines the gains.
These people want to sell on listing day and lock in profit. If the stock, for some reason, does not clear Rs 750 or high net worth individuals’ oversubscription tops 250-300 times, they may be in trouble. Institutional investors may not have a funding problem but make no mistake; many of them are applying simply to flip it post-listing. Sure, they may want to buy it later at much lower levels from an “investment” perspective if the market provides such an opportunity but right now, they just want a quick ride to Rs 900 like the rest of the herd.
Does that mean there will be only sellers post-listing? Far from it. There will be several 29-year-old “hedge fund“ managers who have joined the India party late, who can be sold pretty much anything at any price today. There can hardly be a market without such suckers.
Do not get me wrong, there is absolutely nothing wrong in trying to scalp an IPO. If it makes money, good for you. I have only two apprehensions:
a) The single-minded focus on a grey market price as the sole basis of investing; and
b) The ramifications such a complete dissociation from fundamental value could have for the health of the market.
I wish you luck in the flipping game and hope you can jump off the footboard before the train leaves the station.
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