Reliance Power: An Indian IPO – Part 2

As a continuation to Part 1, the Reliance Power IPO was over-subscribed . There were 3 slices, retail investors, high networth individuals and qualified institutional buyers. All three were over-subscribed by more than 75 times.

In Indian IPOs, you need to send in a cheque for amount you’d like to buy at the IPO price. The company encashes the cheque and then if the issue is over-subscribed, there’s a lottery to see if you’re allotted any shares. Right now, with the intense enthusiasm for investing in IPOs, most issues are over-subscribed. You’re most likely to receive a small fraction of the shares you asked for. Typically, the company gets to sits on your money for about 3 weeks while they figure it out and issue you a full or partial refund.

Anil Ambani’s Reliance Power which was trying to raise $3 Billion, received checks worth $200 Billion! Considering that they might be able to get 5% interest, that works out to around $625 million! Note: all numbers are in US dollars not Indian Rupees. 1 USD = ~40 Rupees.

It is widely speculated that the stock will open about 70% higher when its listed. This will make Anil Ambani the richest man in India, maybe even the world. He’s currently worth about $45 Billion after his networth tripled last year due to the exuberant Indian stock market.

However, the Indian stock market dropped 10% last Monday and a further 20-30% on Tuesday. Its been extremely volatile this week with the markets opening higher and then trending down. Its been reported that a lot of investors in Reliance Power have issued stop-payments on their cheques. Anil Ambani’s networth has also dropped significantly due this correction. Since his companies stock prices are down 25%+, I’d assume that his networth took a $10 Billion hit! The bigger they are, the harder they fall!

This severe correction in the markets has wiped out a lot of investors, mainly the ones that were over-leveraged or those that were speculating in index futures.  A severe correction could happen in the US markets too. Now is a good time to trim back your margin and make sure you’re not over-leveraged.

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