Reliance Capital is another tragedy for retail investors

At that time, the shares of Reliance Capital, in which Ambani held a 52.13% stake, traded at 575 per 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 rose to 32% at the end of September 2019.

During this time, Reliance Capital was beset by both internal troubles, including auditor exit and legal issues, and external problems such as the collapse of Infrastructure Leasing and Financial Services (IL&FS), which triggered a credit squeeze that triggered a credit squeeze. Many non-bank lenders. Since then, most of the big investors dumped their shares of Reliance Capital, causing the stock to fall. At the end of 20 September 2019. But retail shareholders continued to buy the stock, ignoring the troubles, hoping the change would bring them big returns. At the end of September 2021, even though Ambani’s stake fell to 1.5%, retail shareholders held 85% of the company.

At least 762,443 retail shareholders held 57.53% shares in Reliance Capital at the end of the latest quarter. Additionally, 1,017 high-net-worth individuals or individuals who own shares in excess of 2 lakh held 27.42%.

Last week, the Reserve Bank of India superseded the board of Reliance Capital and initiated bankruptcy proceedings, a move that leaves equity shareholders in the lurch. Let alone profit, retail shareholders would be lucky to recover a portion of their original investment simply because bankruptcy resolution puts equity shareholders at the end of the line of claimants. Whatever amount the resolution brings will go to the creditors- first financial, then operational and finally the debenture holders.

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

When the airline was spun off in 2013, retail shareholders held 97% of the shares in Kingfisher Airlines. Retail shareholders in DHFL, when proposed to be delisted in June, owned 52.57%, and most of the shares were owned by shareholders with average holdings. size less than 2 lakhs.

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

Then, 750,276 retail shareholders held 26.99% of the shares and 185 individuals held more shares. As of 30 September 2019, 2 lakh held 4.2% of the shares.

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

On 30 September 2019, Housing Development Finance Corp Ltd had first pledged 1.29% of the promoter shares of Anil Ambani with it, as per disclosures made by the creditor. Starting from 1st October 2019 till the end of March, Yes Bank invoked 17.39% promoter shares spread over 13 days. Finally, in six days during the quarter ended March 2020, several Franklin India-owned funds called for an additional 19.87% of promoter shares.

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

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

Amit Tandon, chief executive, Institutional Investor Advisory Services (IIAS), said, “This investor is beware. You cannot blame institutional investors who are acting on behalf of their shareholders or mutual funds who are acting on behalf of their investors. Retail investors usually miss signs of financial stress, perhaps in anticipation of a bounce-back. Such bounce-backs are extremely rare and more frequent in financially stressed companies, leading to sharper and faster declines in share prices. Faster.” Many fund managers agree with Tandon. “At times, retail investors bet on stocks when it is cheaper without analyzing the poor financial position,” said a Mumbai-based fund manager on the condition of anonymity.