R-Power faces stop payment crisis

Banks face stop-payment calls; IPOs Lose Sheen Due To Fall In Grey Market Premium, Value Picks In Market

Jan 23, 2008
Ashish Rukhaiyar, Himanshu Darji
& RR Goswami
MUMBAI/AHMEDABAD

The public issue of Reliance Power closed for subscription last week. However, the buzz around it is far from over. According to bankers who are associated with the deal, there have been quite a few withdrawals in the non-institutional segment, which is also popularly known as the HNI (for high net worth individual) category.

Market players said the withdrawals have been on account of two factors: the huge oversubscription and a steady decline in the grey market premium. The massive fall in the secondary market has also played a major role, they said.

“There are enough reasons to believe that many HNIs have issued stop-payment instructions,” said a banker on conditions of anonymity. “It happened in the case of Cairn and now it is happening in R-Power. The huge oversubscription (in the HNI category) will lead to small allotments, which will make life difficult for people who have leverage to invest in the issue,” he added.

The number of people issuing such instructions could not be ascertained. Nor could the value be obtained. An official who works with one of banks involved in collection of escrow amounts said there have been stop-payment instructions for bids worth around Rs 4 crore. An RPower official declined to comment on an email questionnaire on this issue.

HNIs typically borrow money at 17-20% to invest in public issues. So, the number of shares allotted and the listing gains play an important role. If both go down, it becomes a loss-making proposition, as the cost of borrowing money or leveraging becomes more than the listing gains.

R-Power’s public issue closed on Friday last week and the HNI category was subscribed more than 190 times. This means an investor bidding for 10 lakh shares would get a little over 5,200 shares. The low allotment is a big blow to HNIs who have borrowed money for one lakh shares.

Such investors could still manage high gains if the stock lists at a massive premium to the issue price, which in this case is Rs 450. If the grey market premium is anything to go by, then the stock is likely to list at a premium of around Rs 200. This is much below the earlier projections of more than Rs 500.

A section of market players are of the view that the recent massive fall could also have triggered a lot of withdrawals, as investors would have preferred to buy stocks at lower levels. In the last one week, the Sensex has lost more than 3,500 points, or 17.4%. Most large-cap stocks have lost anything between 10% and 20%, which provides an excellent buying opportunity with much less risks involved.

Investors looking for a share of RPower can now may look at Reliance Energy, say dealers. “The stock has fallen by nearly 30% in the last one week and provides excellent buying opportunity,” said a dealer.

Some banks in Ahmedabad are believed to have received calls asking for stop-payment on Reliance Power. Tentative estimates peg the amount of stoppayment cheques at over Rs 100 crore. The final figure would be available by January 23. A few co-operative and public sector banks in Gujarat said that that their branches received instructions for stop-payment for cheques issued in favour of Reliance Power.

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