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Reliance Power IPO: Looting REL for ADAG benefit Dev Ghosh
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Reliance Energy Limited (REL) in which the PSU insurance companies hold 22 per cent and general public 11 per cent stake will stand completely emasculated once the proposed IPO of Reliance Power (RP) gets the green signal. From a owner, implementer and builder of big power plants in India, REL will be reduced to a mere contractor with no further prospects of value addition and thus leave its shareholders with a mere paper that will have no future value. This is the upshot of Draft Red Hearing Prospectus (DRHP) of Reliance Power's planned IPO. Forget the small shareholder, it is shocking that even the big players like insurance companies have chosen to keep mum and deliver a silent but a fatal blow to their policy holders who depend.
At present practically the entire power/electricity/energy business is being executed through REL one of the flagship companies of ADAG. The promoter of the Group has, however, now decided that consequent to the RP's planned IPO of Rs 8,000 crore, the entire power business be transferred to RP from REL and in the process convert the latter into a mere contractor in view of its expertise in energy business along with the right technical manpower to execute big projects including the UMMP.
To achieve this, ADAG promoter has taken two-step forwards to push REL many steps backwards. To start with as per the DHRP many of the power projects have been transferred from REL to Reliance Power at no cost basis and the balance projects have been awarded to Reliance Power only on the strength of REL. Reliance Power does not have any employee worth mentioning and nil expertise in any function. The services intended to be availed from REL is so vast that it will be impossible for RP to execute even one per cent of the project without REL. But instead of allowing REL to do this, ADAG has completely stripped REL of its natural and inherent strengths which are its assets and transferred them to RP and in the process reduced REL to a mere contractor. When energy business booms in India, as it will, shareholders of REL will get nothing while RP shareholders will enrich themselves by leaps and bounds.
Look at two steps forward strategy:
ADAG promoter directly owns 50 per cent of RP before its slated IPO. The value of this investment was Rs 1000 crore invested between June 2006 and September 2007 in three installments of Rs 100 crore, Rs 500 crore and Rs 400 crore respectively. Similarly REL also invested Rs 1000 crore and owns the balance 50 per cent of RP.
However, as per rules the entire 90 per cent of the post issue capital should have been owned by REL in which case the value gain to REL shareholders would have been Rs 63,000 crore. But now REL shareholders will own only 45 per cent after the IPO. Hence a simple arithmetic shows that REL shareholders have already lost Rs 31,500 crores. The loss to other shareholders of REL will be a double gain for the promoter to the extent of Rs 42,200 crore.
Strangely it was not the general body of shareholders of REL who decided this transfer of business to RP. The independent directors famously announced by SEBI, representatives of PSU insurance companies completely abdicated their duties and responsibilities and the small shareholders had no say when this transfer of power was completed. In the process REL which is today one of the largest power generating and distributing companies in India will now be made into a small insignificant player by now implementing all the mega power projects in RP. REL will be only an EPC contractor.
The flagship company REL will cease to be one and the flag will be taken away by RP.
REL will not even by a post for the flag.
The second stage of the strategy is to avoid bringing in promoters 20 per cent contribution. For this, ADAG had got its unknown penny kind shell entity RPUPL with a capital of only Rs One Lakh till July 31, 2007 to act. The promoter's personal investment company and REL controlled by the same promoter to invest Rs 500 crore each in the equity share capital of RPUPL in August 2007. It remains a shell company with Rs 100 crore investments. All this money will go into promoter company only. Now RPUPL is merged with RP vide Mumbai High Court okay. One wonders whether all facts were presented. Strangely infusion of capital has taken place within one year of the public issue, which is against SEBI rules. The price at which the capital was subscribed to is much less than what one would have to pay should SEBI guideline be the guiding point. Calculations show that the capital was subscribed to at a price of Rs 60 per share as against Rs 500 one has to pay per share if SEBI guideline is to be followed. This leads to promoter gain of Rs 55,000 crore.
Thus both the existing shareholders of REL and prospective shareholders of RP will lose in this proposed Powerful Transaction.
Strangest of all is the complete silence of PSU insurance companies and its nodal ministry of finance. How is it that the Left Parties which have banned disinvestments in PSUs should allow the PSU Insurance companies to be completely divested of their value. Ultimately, the shareholders of REL, prospective shareholders of RP and policyholders of LIC by not getting the right bonus will be seriously impacted.
Released on: Oct 31, 2007
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