Institute of Management, Nirma University

Financial Services
Group Assignment- Reliance Power’s IPO

Date: 24th March, 2017

Submitted To: Prof. Ritesh Patel

Submitted By:
Group 8
Chaitanya Kamdar (147111)
Nakul Shah (147123)

Deepam Sama (147135)

Shreya Goel (147146)

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About Reliance Power-

Reliance Power Limited is a part of the Reliance Group, one of India’s largest business houses.
The group operates across multiple sectors, including telecommunications, financial services,
media and entertainment, infrastructure and energy. The energy sector companies
include Reliance Infrastructure and Reliance Power.

Reliance Power has been established to develop, construct and operate power projects both in India
as well as internationally. The Company on its own and through its subsidiaries has a large
portfolio of power generation capacity, both in operation as well as capacity under development.

The power projects are going to be diverse in terms of geographic location, fuel type, fuel source
and off-take, and each project is planned to be strategically located near an available fuel supply
or load centre. The company has close to 6000 MW of operational power generation assets. The
projects under development include three coal-fired projects to be fueled by reserves from captive
mines and supplies from India and elsewhere; one gas-fired projects; and twelve hydroelectric
projects, six of them in Arunachal Pradesh, five in Himachal Pradesh and one in Uttarakhand.

Reliance Power's project portfolio also includes 3,960 MW Sasan Ultra Mega Power Project
(Madhya Pradesh). UMPPs are a significant part of the Indian government's initiative to
collaborate with power generation companies to set up 4,000 MW projects to ease the country’s
power deficit situation.

Reliance Power has also registered projects with the Clean Development Mechanism executive
board for issuance of Certified Emission Reduction (CER) certificates.

Reliance Power’s IPO-

During January 2008, the maiden public issue of Reliance Power Limited India, was
oversubscribed 73 times and garnered an astronomical $190 billion. It created many world records.
It was the largest subscription of any IPO (initial public offering) anywhere in the history of global
capital markets with a record five million applicants. It became 10 top listed companies in India
with the largest number of shareholders in any listed company in the world.

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The high growth Reliance Group companies are known for producing stock-market gains from the
moment they are listed. No issue since its inception in the year 1965 had failed to date in the stock
market. So the highly oversubscribed issue was keenly awaited to open on February 11, 2008 in
the twin stock exchanges National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) of
Mumbai, India.

The objects of the Issue were to achieve the benefits of listing on the Stock Exchanges and to
raise capital to :
1. Fund subsidiaries to part-finance the construction and development costs of certain of 12
power generation projects currently under various stages of development;
2. General corporate purposes;
3. Achieve the benefits of listing on the Stock Exchanges.

The issue details are as follows:

 Issue Open: Jan 15, 2008 - Jan 18, 2008

 Issue Type: Book Built Issue IPO
 Issue Size: 260,000,000 Equity Shares of Rs 10 aggregating up to Rs 11,563.20 Cr
 Face Value: Rs 10 Per Equity Share
 Issue Price: Rs. 405 - Rs. 450 Per Equity Share
 Market Lot: 15 Shares
 Minimum Order Quantity: 15 Shares
 Listing At: BSE, NSE

But for the first time in history of Indian stock markets the Reliance magic did not work. For a few
moments on the opening day, Reliance Power surged 19% to 538 rupees ($10.94) from the IPO
price of 450 rupees ($9.15). After the initial surge of four minutes the dream vanished and RPL
dived to 355 rupees ($7.23) per share never to return even close to the issue price. By the close of
the day, it was down 17% at 372.50 ($7.57) rupees. Four billion of its market capitalization wiped
out and with it billions of rupees of investors’ wealth.

In the following days, the nightmare worsened as another $5 billion of the market capitalization
was lost. The blow was severe and went far beyond Reliance Power. The listing affected all the
group companies of the Reliance Group. As a face saving measure Reliance Power Ltd issued free

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bonus shares to all categories of shareholders, excluding the promoter group (comprising of
Reliance Energy Ltd.(REL) and the ADA Group), in the ratio of 3 shares for every 5 shares held.
The proposed bonus offering resulted in reduction of the cost of Reliance Power shares with an
offer price of Rs.269 ($5.47) per share for retail investors, 40% lower than the IPO price of Rs.430
($8.74) and Rs.281 ($5.71) per share for other investors, and 37% lower than the IPO price of
Rs.450 ($9.15). REL announced buyback of the shares to prevent the shares to slide further which
didn’t happen although. The performance of Reliance Power Ltd. after the IPO was good but not
so excellent to support this exorbitantly high IPO Pricing.

Analysis of the Risk Factors Identified-

1. Exorbitant valuation with respect to peer comparison- Reliance power had priced their IPO
aggressively. This was one of the major factors for their downfall. Analysts suggested that it
was overvalued when compared with peer companies in India. For instance, the IPO price was
450 against the price of NTPC, (the government power company) at Rs.250/-. RPL was
planning a 28000 MW power plant in 2017 and did not have a single operational power plant
whereas NTPC had 27350 MW of operational power plant in the year 2007. Also, RPL
compared poorly against the financials of Tata Power. Thus, exorbitant valuations became a
huge risk factor.
2. Industry Uncertainty- Faced with challenges like fuel supply risks, cost overruns at private
plants and financially weak discoms, India’s power sector outlook remains negative, says
Moody’s Investors Service. The outlook is negative because the industry faces persistent
challenges, mainly resulting from high, albeit moderating, fuel supply risk, cost over-runs at
some plants operated by independent power producers (IPPs), and the limited capacity to pay
on the part of financially weak distribution utilities. Some independent power producers (IPPs)
are also locked into power purchase agreements (PPAs) that have become unviable because
they do not allow the high costs of imported fuel to be passed through. Indian power
generators’ capacity utilization will likely be limited by the financial weakness of off-takers,
in turn constraining off-take electricity demand, despite growing electricity demand and
increasing domestic coal.

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3. Long Gestation Periods- Power sector is a highly capital intensive business with long
gestation periods before commencement of revenue streams with construction period of 4-5
years in case of Thermal Projects and 8 - 10 years for Hydel Projects. Since most of the projects
have a long time-frame, there are some inherent risks in both the internal & external
environment. If we expect our economy to keep growing at 8 - 9% per annum, we need a
commensurate growth in Power supply. Power sector has made good progress over the past
few years. It has also seen very significant changes. Utilities have been restructured. Strong
regulatory Institutions have been established. There is much greater public participation in
Tariff-setting exercise. Tariff distortions have reduced over a period of time. Even after all this,
the nation has not been able to meet the demand and improve financial health of distribution
sector.

4. Regulation challenges- Land Acquisition poses an increasingly significant challenge in the

Indian Power sector. Power plants and utilities face major constraints and delays regarding the
availability of land and obtaining the requisite environment and other clearances for the
projects. t has been reported that in some cases, even after land owners were asked to sell and
handover their land in ‘Public Interest’, the project was not completed for several years due to
other delays, a fact that eroded the credibility of both the industry and the government.

5. Systematic Risk (Market Risk)- It was the IPO which was trading at double the offer price
in the grey market trading. Still on the listing date it went for a tailspin. The reason was markets
and the behavior of market participants. In the last quarter of FY 2007-08, several large equity
offerings, including those from reputable business houses, struggled to hit their targets. India's
stock markets had been volatile, reacting to fears of a widening global credit crunch and fears
of a U.S. recession. Despite the cancellation of Wockhardt and Emaar MGF IPO, the markets
were waiting for Reliance Power IPO to be listed. The hope was that the Reliance power IPO
listing will give a new positive direction to the markets. But it failed miserably.

6. No operational experience until IPO- Reliance Power’s IPO got fully subscribed in the very
first minute of its opening & attracted $27.5 billion of bids on the very first day, equivalent to
10.5 times the stock on offer. But the IPO was neither floated to augment any existing

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 infrastructure of the company nor to expand the company’s presence in its sector. The money
was to be used for funding the development of 6 power projects (from scratch) across India.
The company was just a virtual entity till then.

7. High Debt Burden- From the current year itself, the company expects to operate with a debt
burden to the extent of more than 13970 crores. At the same time, the company expects to start
obtaining operational cash inflows only after two years of the IPO i.e. form 2010. The level of
borrowing is higher than the equity raised and may pose long term challenges to the operational
sustainability of the enterprise given that the business is highly Capital intensive and would
constantly require raising of more debt atleast in the short term. Financial Leverage looms
heavily as a risk posing challenges to the operational yields of the project. The company further
plans to start repaying on its debt only from 2012, which raises question on the sustainability
of the business taking into consideration high price and regulatory uncertainties of the sector.

8. Lack of Liquidity to sustain large issue size- Reliance is the largest Public Offering in the
Indian Capital Market. The issue has seen huge participation from HNI and retail investors
even contributing a sudden surge in opening up of demat accounts in the market. It is to be
seen if Indian markets are liquid enough to sustain such a huge offering. Absence of sufficient
liquidity in the system might be a stimulator of downfall in stock prices in a case wherein
demand is saturated against huge stock supply. Also, inexperienced retail investors looking for
short term gains might be keen to book their gains as soon as the stock gets listed. In such a
scenario, FIIs may be encouraged to take advantage of the supply glut and sell the stock short
further contribute to a plunge in share prices and loss of confidence among other investors
leading to failure of the issue.

Conclusion-
On 15 January 2008, the company attracted $27.5 billion of bids on the first day of its initial public
offering (IPO), equivalent to 10.5 times the stock on offer, thereby, creating India's IPO record.
The upper cut off price for the bid was Rs. 450. The proposed IPO was to fund the development
of its six power projects across the country whose completion dates were scheduled from
December 2009 to March 2014. Reliance Power debuted on the stock markets on 11 February

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2008. However, the markets were still reeling after the January 2008 stock market volatility, and
concerns over speculation that the issue was overpriced sent the stock plummeting soon after its
listing. At the end of the day, the stock traded at a value that was 17 per cent lower than its issue
price of Rs.450. Investors who were betting on the stock reaching 1.5 or even twice its issue price
lost a fortune in the process. On 25 February, in an effort to mitigate investor losses, Reliance
Power decided to issue 3 bonus shares for every 5 shares held.

References-

http://www.reliancepower.co.in/about_us/company_profile.htm

http://icmai.in/Knowledge-Bank/upload/case-study/2014/Debacle-of-Reliance.pdf

http://www.chittorgarh.com/ipo/reliance_power_ipo/128/

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