Anil's first float sinks Reliance image

More than five million investors waited in keen anticipation for the great man's son to ring the opening bell at the Bombay Stock Exchange on Monday and the start of trade in a company that had attracted subscriptions worth US$190 billion.

Anil Ambani, a break-away scion of India's famed Reliance Group, had three weeks earlier overseen the $3 billion initial public offering - India’s largest - of Reliance Power Ltd (R-PL) and added billions of rupees to his own vast wealth as his fellow Indians bought into his aura of almost unearthly success.

Then the bell rang, and for the first time in history of Indian stock markets the Ambani magic did not work.

Reliance Group companies are known for producing stock-market gains from the moment they are listed, and for a few moments on Monday money seemed there for the taking once more as Reliance Power surged 19% to 538 rupees from the IPO price of 450 rupees (US$11.42).

The promise of lucre hung there for a few seconds, before the dream vanished and R-PL dived to 355 rupees per share never to return even close to the issue price in the next five and a half hours of trading. By the close, it was down 17% at 372.50 rupees, $4 billion of its market capitalization wiped out and with it billions of rupees of investors’ wealth. And tarnished, if not also destroyed, was the invincible image carefully built over three decades by Anil's father, the legendary Dhirubhai Ambani, that an Ambani-float never loses money.

In the following days, the nightmare worsened as another $5 billion of the market capitalization was lost. By Thursday the stock was trading at around 364 rupees.

The sharp decline "was a big disappointment for millions of investors who applied [for the shares] with high hopes driven primarily by the high-profile marketing of the IPO", said Mumbai-based investment advisor S P Tulsiyan. "But the worst fallout of the flopped listing is that retail investors have lost faith in the Reliance Group, particularly in the Anil Ambani faction."

The blow was severe and went far beyond Reliance Power. The listing affected not only the stock prices of companies controlled by Anil Ambani; it also impacted the share prices of the companies of Mukesh Ambani, who controls a slightly larger share of Reliance Group.

The price of all Reliance stocks, including flagship Reliance Industries Ltd [RIL], were hammered for the next two days. It was a roll call of Indian industry - Reliance Petroleum (like Reliance Industries a Mukesh Ambani company), Reliance Communication [RCom], Reliance Energy, Reliance Capital, Reliance Natural Resources and all other Anil Ambani-managed companies shed anywhere between 6% to 25% of their market capitalization in the period.

"The Reliance Power debacle has taught me to never take the Reliance Group for granted,'' said Rajesh Patwa, an investor. "From now on I’ll think twice before investing in Reliance companies, particularly in their IPOs."

Patwa was not alone in his reaction, according to Shankar Sharma, head of First Global Stock Broking Ltd, a Mumbai-based stockbroker and investment banker. "It is clear that the perception of a sort of infallibility the Reliance Group has been created over the years has been shattered with the debacle of the R-PL listing," he said. "The next time, any IPO from this group has to be priced with some fundamental safety net."

Large scale
Like his elder brother Mukesh, Anil Ambani does everything at an absurdly large scale. Where his brother's Reliance Industries features as the largest private sector enterprise in India (and comfortably ranking in the Fortune 500 list) with over $27 billion in revenues, Anil had to make sure that RCom, the mobile telephony company he controls, is the largest in its sector. If Mukesh Ambani embarks upon building the world's largest petroleum refinery - through Reliance Petroleum - Anil too has to build Reliance Power as one of the world's biggest power plants using clean-burning natural gas.

Both brothers have cashed in on the goodwill of Dhirubhai, who died in 2002 after shaping India's equity culture by attracting millions of retail investors in a market that was then dominated by financial institutions. Through repeated public offerings of Reliance Industries since its IPO in 1977, none of which went below their issue price, Dhirubhai revolutionized the country's capital markets by generating billions of rupees in wealth for those who put their trust in his companies.

The IPO of Reliance Power, which had no assets and little cash flow to boast off, benefited from the Reliance brand name and also the present euphoria in India's stock markets, attracting subscriptions for 73 times more shares than were available.

It was the first company flotation by Anil Ambani's ADAG (Anil Dhirudbhai Ambani) Group since he carved it out after splitting with his brother following the death of Dhirubhai in July 2002. The ADAG Group's five previously listed companies were all spun off from Dhirubhai’s Reliance Empire when his sons formally split it in January 2006.

The Reliance Power debacle is intriguing considering the fact that barely a month back, the announcement of the IPO had investors from around the world scrambling to get a piece of the company. Qualified institutional investors (read foreign institutional investors) poured in $100 billion to oversubscribe their share of the float by 82 times. Rich investors or high-net worth investors (HNIs as they are called in India) who had put in single applications worth $260,000 each were even more aggressive, bidding for 163 times more than the number of shares earmarked for them. Retail investors - those who had put in $2,500 worth of applications each - oversubscribed to the extent of around 15 times.

So what went wrong? The debut was not helped by a souring in global market mood as the reverberations of the US subprime and credit crisis swept around the world. Between January 4, when the IPO was announced, and the listing date of February 11, the benchmark Sensex index fell over 4,000 points, or almost 20%, from historic highs of around 20,686 points to 16,630.91 points.

The Indian stock market was also particularly weak on February 11, when it fell by 8%. But that according to analyst that was due to the Reliance Power debacle as investors sold other shares to pay for losses after buying the stock on borrowed money.

Some say Reliance Power's downfall was linked to aggressive pricing of the IPO. "As we have been warning right from the day the IPO pricing was announced, it was too richly priced," said S P Tulsiyan in Mumbai. "According to our calculations, the IPO was at least 20% overvalued when compared with peer companies in India. For instance, the IPO price was assigned a phenomenal price-to-asset value ratio of 6, for a company that does not even have a power plant on the ground. Whereas NTPC (a local power company), which already has as as big a project as what R-PL proposes to set up by 2010, trades at around 3 times its present asset value."

Tulsiyan blames this overpricing squarely on the merchant bankers who marketed and managed the IPO, and on the market premium in the grey, or unofficial pre-listing, market where the stocks changed hands at prices that encouraged many buyers of the IPO to believe that they would easily get an immediate return on their investment.

Critics add that Anil along with the merchant bankers also created hype through a pre-IPO advertising blitzkrieg that with the slogan "Power On, India On" tried to portray India's scorching economic growth is solely dependent on availability of power. Anil dismisses the allegation: "To say that nearly 500 sophisticated institutional investors from across the globe, and 5 million retail investors, were all taken in by hype to an extent that they committed a staggering $190 billion is an unfair comment on their collective intelligence and understanding."

Still,the Reliance Power listing would have missed disaster had not almost every investor who applied in the IPO done so just to make a quick buck, according to Sharma of First Global. "Everybody bought to flip and not as an investment," he said . Flipping is the practice of buying IPO shares and selling as soon as trading begins, usually for a substantial profit and not just for retail investors lucky enough to get offer shares. Institutional investors get most of the shares at the offering price and stand to gain hugely from the practice, particularly in a hot IPO market, when the price of a new company often rises dramatically above the offering price on the first day.

"This includes everybody from the financial investors to high net worth investors to even retail investors. But what is very surprising is that the foreign institutional investors who claim to have great insight into financial markets, great modeling skills, and global investing experience could not pick wheat from the chaff," Sharma said.

The Reliance Power listing, debacle though it was, of course had an upside; it made Anil Ambani, already the world's sixth-richest man according to the Forbes List, move a notch higher. Rough calculations suggest that with the listing, Anil's net worth surged $13 billion, closer to but still about $6.4 billion below his brother Mukesh's $51 billion net worth.

Even after the sale, Anil holds 46.96% of Reliance Power shares directly and 15.49% through Reliance Energy, of which R-PL is an offshoot. The new listing increased the market capitalization of ADAG Group by $21.5 billion to $78.77 billion.