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BACKSTORY: The RPower IPO debacle


Following the debacle, the questions propped up. How was a new company with meagre profits of Rs 16 lakhs and which had no significant assets or cash flow allowed to list the shares at a whopping premium.

BACKSTORY: The RPower IPO debacle

February 11, 2008, was a landmark date for the Bombay Stock Exchange. On that day the shares of Reliance Power listed after the company had mopped up a record Rs 11,563 crore in its initial public offering (IPO).

For days, the buzz surrounding the issue had been growing as investors’ expectations ran high. With the government announcing plans for ultra mega power projects, the sector was hot and there was the Reliance tag which for years had guaranteed exceptional returns. The Anil Ambani group was also the flavour of the season and its chairman had staked a lot on the IPO. The new company had said it was developing 12 power projects with a combined planned installed capacity of 28,000 MW, which was then one of the largest portfolios of power generation assets under development.
The brokers were convinced and gave the thumbs up. Just before the listing the grey market premium for the shares went soaring to 80 percent setting the stage for a grand opening.
Eager investors believed that the shares trading under the symbol RPower just had to list and riches would follow. It was no surprise that the IPO, which was oversubscribed approximately 70 times, attracted over 5 million bids from all categories of domestic and international investors.
As trading began that Monday morning, their expectations appeared to be coming good. In the first few minutes of trading, the stock soared to Rs 547.80, a premium of 21 percent over its issue price. But that dream run lasted all of a few minutes. After that, it was devastation all round as the stock started dropping. Some gyrations later, it eventually dropped to Rs 372.50 by the end of trading hours. The sharp decline meant the loss of billions in market capitalisation. Many investors, particularly small ones who had borrowed heavily to buy the shares, were wiped out.
Following the debacle, the questions propped up. How was a new company with meagre profits of Rs 16 lakhs and which had no significant assets or cash flow allowed to list the shares at a whopping premium. But it was too late.
To be fair, the luck of the draw was also against RPower. The IPO suffered from the fear psychosis that had gripped the markets as the subprime financial crisis in the US started unfurling. That January the existing home sales rate in the US fell to its lowest level in 10 years. The banking sector was showing signs of growing stress. These events were beginning to singe markets in India as well. In the five weeks following the January 4 announcement of the RPower IPO and its listing on February 11, Sensex had dropped by 4000 points.
The company believed there had been foul play and even filed a complaint with market regulator SEBI for investigating a campaign against it. In an effort to mitigate the woes of the investors, it announced free bonus shares to all categories of shareholders, except the promoter group.
None of the steps though would help investors recover what they had lost as the stock never again touched its listing price.
—Sundeep Khanna is a former editor and the co-author of the recently released Azim Premji: The Man Beyond the Billions. Views are personal

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