Making good

Anil Ambani has made a virtue out of necessity. Faced with serious reputational risk, which almost certainly would have come in the way of his taking more companies public and thereby torpedoed his ambitious expansion plans (one of his companies has already filed IPO papers with the stock market regulator), the chairman of Reliance Power felt it necessary to take steps that would deal urgently with the widespread shareholder disillusionment that followed the listing of the R-Power stock at a substantial discount to its issue price. Mr Ambani moved quickly, and on Sunday came out with a generous bonus share announcement that more than compensates those shareholders who have held on to the company stock despite its turbulent though brief history (those who sold in the interim in an effort to cut their losses have of course lost out for good).

In doing so, Mr Ambani has protected Reliance Energy's 45 per cent share in the company, and taken a personal hit of Rs 5,000 crore. This is without precedent, as Mr Ambani has not failed to point out, but it is possible to quarrel with his list of reasons for doing what he has. He has complained about motivated dumping of R-Power's stocks by some Mauritius investors, and cited the change of market mood between the opening of the IPO and its listing date, as reasons for the stock's disappointing performance after listing. It is not that these are erroneous statements, but they would be complete as explanations only if he were to also acknowledge that an important reason for his having to announce the bonus share issue was his over-the-top pricing of the IPO, exploiting a stock market fever that fed on an ephemeral grey market whose premium disappeared as quickly as it had materialised. If this has been a signal lesson for punters to not treat share investments like casino betting, it should also be a lesson for company promoters who get too hungry to make a killing on the market.

In taking the hit personally, Mr Ambani has come out smelling of roses. But critics still have a point when they say that he had acquired the shares in the first instance at a tiny fraction of the price paid subsequently by retail investors; so he has only given up a small part of this gain. Net net, he is still very much a winner, on a grand scale.

One obvious question now is whether Mr Ambani's handling of a post-IPO fiasco should set a benchmark, whereby company promoters are obliged by the rules to compensate retail shareholders who may have lost out on a share listing. The answer has to be in the negative, because providing for a mandatory fallback would only encourage perverse behaviour: more company promoters would be tempted to pull off over-the-top pricing, in the belief that if the IPO went through smoothly, all was well. And if it did not, then the promoter would still be no worse off than if the share issue had been more modestly priced in the beginning. Not is it a solution to bring back government control over IPO pricing, for (as past experience shows) the remedy would be worse than the disease. The only sensible argument remains the familiar one of caveat emptor: the buyer should be aware of what he is doing. Also, the risks are probably greater in a heated bull market, which has mercifully given way to one with more rational expectations.