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The Reliance Capital collapse: Another cautionary tale for retail investors

At the end of September 2021, even as Anil Ambani’s stake in Reliance Capital dropped to 1.5%, retail shareholders owned 85% of the company.Premium
At the end of September 2021, even as Anil Ambani’s stake in Reliance Capital dropped to 1.5%, retail shareholders owned 85% of the company.

  • Small shareholders end up missing signs of financial stress in hope of a bounce-back, say analysts
  • As many as 762,443 retail shareholders together held 57.53% shares in Reliance Capital at Q2-end

MUMBAI/BENGALURU : Five years ago, Reliance Capital Ltd chairman Anil Ambani sounded a bullish note about the company’s prospects during its annual general meeting. Attributing it partly to the good tidings brought to the company by his son Anmol Ambani who had joined the company board a few months before, he noted that its shares had risen 40% since.

At the time, the shares of Reliance Capital, in which Ambani owned 52.13%, traded at 575 a share. Retail shareholders, including high-net-worth individuals, owned 14.78% of the company at the end of September 2016.

Three years later, Ambani’s stake dropped to 41%, while retail ownership increased to 32% at the end of September 2019.

During this time, Reliance Capital was rocked by both internal troubles, including the exit of the auditor and legal issues, and external problems such as the collapse of Infrastructure Leasing and Financial Services (IL&FS), which triggered a credit squeeze that roiled many non-bank lenders. Since then, most large investors dumped their shares of Reliance Capital, sending the stock plunging to 20 at the end of September 2019. But retail shareholders continued to buy the stock, overlooking the troubles, hoping a turnaround would give them outsized returns. At the end of September 2021, even as Ambani’s stake dropped to 1.5%, retail shareholders owned 85% of the company.

As many as 762,443 retail shareholders together owned 57.53% shares in Reliance Capital at the end of the latest quarter. Additionally, 1,017 high-net-worth individuals or individuals owning shares more than 2 lakh held 27.42%.

Last week, the Reserve Bank of India ousted Reliance Capital’s board and started bankruptcy proceedings, a move that leaves equity shareholders in the lurch. Let alone profit, retail shareholders would be lucky to recover a fraction of their original investment simply because a bankruptcy resolution places equity shareholders at the end of the queue of claimants. Whatever amount the resolution will fetch will go to creditors—first financial, then operational and finally debenture holders.

Reliance Capital’s collapse is another warning to retail shareholders about the enormous risks associated with trying to catch a falling knife, said fund managers and executives of proxy advisory firms. Similar stories have played out in the past, including in Kingfisher Airlines and Dewan Housing Finance Corp. Ltd (DHFL).

Retail shareholders owned 97% of shares in Kingfisher Airlines when the airline was grounded in 2013. Retail shareholders in DHFL, when it was proposed to be delisted in June, owned 52.57%, and the bulk of shares were owned by shareholders with an average holding size of less than 2 lakh.

In the case of Reliance Capital, large shareholders, including mutual funds, foreign portfolio and institutional investors, and banks, held 14.1% shares as of September 2019.

Then, 750,276 retail shareholders together owned 26.99% shares and 185 individuals owning shares more than 2 lakh held 4.2% shares as of 30 September 2019.

How did retail shareholders manage to own such a large share of the company —increase from 32% to 85% in two years?

On 30 September 2019, Housing Development Finance Corp. Ltd first invoked 1.29% shares of Anil Ambani promoter shares that were pledged with it, according to disclosures made by the creditor. Beginning 1 October 2019 and until March-end, Yes Bank invoked 17.39% of promoter shares, spread over 13 days. Finally, over six days during the quarter ended March 2020, many of the funds owned by Franklin India invoked an additional 19.87% of promoter shares.

Over six months, between October 2019 and March 2020, the banks sold about 40% of Ambani’s shares.

Instead of holding these shares, banks and other creditors sold these shares to individual shareholders.

“It is investor beware," said Amit Tandon, chief executive, Institutional Investor Advisory Services (IIAS). “You can’t blame the institutional investors who are acting on behalf of their shareholders or mutual funds who are acting on behalf of their investors. Retail investors typically end up missing the signs of financial stress, perhaps in the hope of a bounce-back. Such bounce-backs are extremely rare and more often in financially stressed companies, the fall in share price is rather sharp and fast." Many fund managers concur with Tandon. “Many times, retail investors bet on stocks when it is cheap without analysing the deteriorating financials," said a Mumbai-based fund manager, on the condition of anonymity.

 

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