Reliance Power: applicants rush to stop payment for IPO

Wednesday, January 23, 2008

Reliance Power: applicants rush to stop payment for IPO

Original story:

The mayhem in the stock markets for two consecutive trading sessions has taken its toll on the unofficial or grey market for stocks that has gone into “coma”, according to top brokers dealing in the market. Meanwhile, the grey market premium for shares of Reliance Power Ltd has sharply dipped from Rs. 500 to Rs. 100.

The fall has unnerved some investors who rushed to banks to “stop payment” of cheques they had issued to participate in the Reliance Power’s initial public offering (IPO).

Approximately five million investors had made an aggregate bid of Rs1,622 crore for the Reliance Power shares. Bankers to the issue and the collection banks are HDFC Bank Ltd, ICICI Bank Ltd, ABN Amro Bank NV, Axis Bank Ltd, Kotak Mahindra Bank Ltd and the Hong Kong and Shanghai Banking Corp. Ltd (HSBC).

After a cheque is submitted along with an application, the collection bank sends it to the clearing house, which, in turn, sends it to the drawee bank (or bank on which the cheque is drawn).

At any time during the process, the investor can tell the drawee bank to stop payment on the cheque. Once this is done, the drawee bank sends the application and the cheque to the collection bank, which, in turn, sends back the cheque along with the application to the investor whose application stands cancelled.

Sanjay Bothra, manager of Paldi branch of State Bank of Saurashtra in Gujarat, said he received several applications from his customers to stop payment, aggregating around Rs. 12 crore worth of shares in Reliance Power’s IPO.

“With such a steep fall in the stock market, we received requests from some of our clients to stop payment towards subscription of the Reliance Power IPO and we have done so,” he said. Officials at a State Bank of India branch in Gujarat have got more than 24 applications with similar “stop payment” instructions in the span of a couple of hours.

Things are no different in Mumbai. A branch manager at a large Mumbai-based brokerage, who did not wish to be identified, said that he has advised one of his high net-worth clients, who has applied for 200,000 shares and taken a funding of Rs. 50 crore for the same, to instruct his bank to “stop payment” for 100,000 shares. Executives at another Mumbai-based mid-sized brokerage said at least 30-35% of their clients, who had applied for the Reliance Power IPO, are now instructing their banks to stop payment.

Pradeep Bhavnani, a Mumbai-based sub-broker, who had mobilized 20,000 application for the Reliance Power IPO in the high net-worth individual and retail category, has instructed the banks to stop payment on close to 12,000 cheques on behalf of his clients in the last two days. According to him, Rs. 2,000 crore has been withdrawn through these cheques. “In the grey market, various quotations are coming and all of them are dicey. No retail investor is willing to take the risk.”

Bhavnani, who is also the president of National Association of Small Investors, wrote to the capital markets regulator on 21 January about the decision of some small investors to withdraw from the issue because of a meltdown in the financial markets.

Bankers based in Mumbai said a clearer picture will emerge in a couple of days as (Reliance Power) IPO applications were still pouring in for cheque clearance.

According to people familiar with the development in the grey market, the premium for Reliance Power shares was as high as Rs. 500 when the issue was open for subscription. “Yesterday some people wanted to sell at a premium of Rs. 225, but they failed to do so and today there is no buyer. Most of the grey market traders have switched off their mobiles,” a market operator said.

“Nobody is willing to give or take any sauda (bid) and many brokers in the grey market may back out of their commitment for Reliance Power IPO,” said another broker operating in the grey market, who too did not wish to be named.

The brokers do not expect any activity in the grey market for the next half-a-dozen IPOs that are set to enter the market next month.

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