Reliance Power IPO powers on: But when and at what price?

15 January 2008

'Power On, India On' – there is no doubt about that. But, Reliance Power will take a long time to turn on its generators and the valuation is a bit too exuberant. By Vivek Sharma

The power is finally ''turning on'' today, as the Reliance Power IPO opens to unprecedented frenzy among investors. Stories about the IPO are prime time news on most television channels, not just business channels. There has been a surge in demat account openings, brokers are said to be taking demat accounts on rent to apply for the IPO and the Reliance Power stock is rumoured to have already doubled in the grey market.  

There is no doubt that this IPO will become a case study in many business schools across the world. This is simply the best marketed IPO the country has ever seen and 'Power On, India On' is probably the best catch phrase invented to sell an IPO. Even the controversies surrounding it, with allegations and counter-allegations flying between the two Ambani brothers, seem to have only added to the allure of the IPO.  

But, will Reliance Power become a case study for future investment professionals on how a start-up company with unlimited ambitions became one of the best investments? Will it become a case study on how one company re-wrote the rules of a staid industry, reinvigorated it and cleared the path for incredible growth?  

Why Reliance Power was made separate?
Reliance Power took over most, not all, of the power generation projects that were awarded to or were in active consideration by the Anil Ambani group. The group's established power utility, Reliance Energy, should have executed these projects in the normal course. But, Reliance Energy will own only around 45 per cent of Reliance Power's post-IPO capital.  

Anil Ambani, through his privately held investment company, will own another 45 per cent and the rest will be with the public. In effect, Anil Ambani, who is also the largest shareholder of Reliance Energy, has a majority stake in Reliance Power. Is this shareholding structure unfair to minority shareholders of Reliance Energy, who should also have been extended the full economic benefits of the power generation ventures?  

While Reliance Energy is an established power utility, the promoter does not have any background competency or expertise in the power sector. So, what did the promoter bring in to take an equal equity stake in the generation projects?