In an unexpected move, Reliance Industries Ltd offloaded a 4% stake in subsidiary company Reliance Petroleum Ltd (RPL) for about Rs4,023 crore. The company says the share sale broadens the company’s shareholder base even as some media reports suggest that the move was aimed at enhancing the position limit of the RPL counter in the derivatives segment.

Fresh positions in the scrip were barred as its open interest had breached the prescribed market-wide position limit of 95%. The market-wide position limit is defined as 20% of the free-float market capitalization. Reliance’s move to sell part of its 75% stake has now increased free-float capitalization by one-fifth, and when the market-wide position limit is determined after the November series expires on the 29th, traders will have additional room to take fresh positions in RPL shares.

As it is, after the ban on fresh positions, open interest on the counter has gradually come down to about 79%. When trading on the new series begins at the end of this month, therefore, there’ll be a lot more additional room for traders to play in—the 20% addition due to Reliance’s dilution and the 16% reduction in open interest in the past few weeks.

RPL shares have fallen about 29% from their highs primarily because of the curbs on creating fresh positions in the derivatives segment. Besides, some foreign brokerages released “sell" calls on the stock, citing high valuations. While the concern on valuations may remain, fresh trading interest could revive the stock’s fortunes.

While Reliance’s interest in freeing up trading position limit in RPL is debatable, one indisputable fact is that the company’s investment in the refining subsidiary has provided rich dividends even before the plant has gone on stream. The company’s total investment in RPL, including the stake it purchased during the initial public offering (IPO), is Rs8,280 crore in exchange for 3,600 million shares. Thus, its per share acquisition cost is just Rs23.

The recent stake sale of 180 million shares was at an average price of Rs223, nearly 10 times its acquisition cost. Earlier, around the time of the IPO, Reliance had sold 225 million shares to Chevron Corp. for Rs1,350 crore. Adjusted for these two sale transactions, Reliance’s net investment in RPL is just Rs2,907 crore, or Rs9.10 per share; and it still has a 71% stake, which is worth Rs66,960 crore at current prices.

Share of QIPs

Qualified institutional placements (QIPs), a form of private placement of equity to institutional investors, have curbed the export of India’s capital markets in at least one key segment. Bloomberg data shows that so far this quarter, QIPs worth $962 million (Rs3,810 crore) have been issued by seven companies, eclipsing the funds raised through foreign currency convertible bonds ($846 million) and from overseas depository issuances ($530 million).

True, one swallow does not make a summer. But note that the share of QIPs among corporate India’s various fund-raising avenues has been on the rise. In the September quarter, QIPs worth $1.44 billion were issued by six companies, indicating an average deal size of $240 million. Issuances through depository issues amounted to $1.26 billion in the same ­period.

Equity issuances through depository receipts are the directly comparable fund-raising avenue in overseas markets, and QIPs have made a visible dent in this segment. Although they were slow starters and there were concerns whether large-sized deals would find takers in the Indian markets, the faster and simpler mechanism of QIPs seems to have appealed to companies.

Prior to the introduction of this product, companies had to take the long and winding route of follow-on offerings. The other option was to resort to private placements, which entailed a one-year lock-in for investors. This was the reason for the preference for overseas issues earlier.

It must be noted that the appetite for QIP issuances has gradually picked up. The regulatory clearance for QIPs came in May 2006, but deals worth only $875 million were done in all of 2006 and the average deal size was less than $50 million. This calendar year, deals worth nearly $3 billion have been done.

Another popular route for fund-raising has been foreign currency convertible bonds (FCCBs), which have recently taken a hit owing to the Reserve Bank of India’s guidelines for fund-raising through external commercial borrowings.

While the Securities and Exchange Board of India has permitted the issuance of convertible bonds through the QIP route, the convertible segment hasn’t taken off because of restrictions on foreign ­investors. Further clarity and relaxations in this area would do much to stem the export of the country’s capital markets.

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