January 18 was a historic day for Indian bourses. Between 8am and 9am, Indian Standard Time, the stock exchange scheduled a special trading session solely for price discovery in Reliance Industries ("RIL") and its erstwhile subsidiaries, Reliance Energy, Reliance Capital, Reliance Infocomm and Global Fuel Management Services (which will look after all contacts for sourcing and supplying gas from RIL to Reliance Energy for its gas based power generation projects).
The combined shares had closed the previous day at Rs920. At 8am Reliance Industries opened at Rs700 on a stand-alone basis, traded up to Rs725, then closed around Rs715.
On a sum of the parts basis, the Anil Ambani Reliance companies have been valued by the markets at between Rs200 and 225. Of this Rs65 can be immediately realized given that Reliance Capital and Reliance Energy (erstwhile BSES) are listed.
The residual value, which can be attributed to Reliance Infocomm, translates to Rs160 to 165. Some of the bulls on the street had been suggesting that Reliance Infocomm would be valued higher at Rs190 to 200.
The discount may factors in the market risk of the stock's unlisted status. An IPO is expected later this year, but few are confident whether issuance conditions will remain favourable given the stock market's heated status.
At the open of normal trading an hour later, RIL continued to be among the top traded shares. Domestic sentiment was weak, perhaps affected by weakness in some other Asian markets such as Japan. RIL closed the day at Rs695/96 down about 3.5%.
The special one hour trading session was deemed necessary because RIL is among the top traded futures, has the highest weighting in the BSE Sensex (which uses a free float methodology) and the second highest weighting in the NSE Nifty. Its respective weighting are 11.46% and 9.04%.
One interesting aspect of the RIL demerger has been a run up in the share price of ONGC. Several traders have been buying ONGC in anticipation of an increased index weighting post demerger. ONGC has the highest weighting in the Nifty (12.55%) and the sixth highest weighting in the Sensex. Traders are speculating that index funds will be forced to increase their ONGC holdings due to the reconstituted weightages.
Rajesh Baheti, proprietary stock broker, trader and hedger says, "The fact that the price neither spiked nor saw any drastic falls despite 20 million shares changing hands, shows that the market had already formed a consensus about Reliance and the de-merged entities."
The shares were also traded without any circuit breakers, a first on the Indian stock exchanges and some traders had expressed concern that the trading would be very volatile.
The rift between Dhirubhai Ambani's sons and heirs, Mukesh and Anil, became public in late 2003 and continued until June, 2005 when their mother, Kokilaben, assisted by KV Kamath of ICICI Bank and Nimesh Kampani, head of JM Morgan Stanley, brokered a settlement. The main terms of the formula were that Mukesh Ambani would inherit sole control of RIL and IPCL, while younger brother Anil would get Reliance Infocomm, Reliance Energy, Reliance Capital.
Exact details of the valuations used for the split have never been released, leading to concerns that retail investors might not have the necessary expertise to calculate break up and replacement values.
But the investor community has largely welcomed the move to a more market driven approach in determining RIL's price. For many Indian investors RIL was the first share they owned. Some retail investors are therefore keen, both for sentimental and value driven reasons, to once again have the flagship company of the Reliance group, RIL, valued only for itself.
