Rex Mathew clears the confusion about the value of the shares in RIL's de-merged ADAG group companies.

The delay in listing the four de-merged companies and the proposed mergers between two of the companies transferred by RIL to Anil Ambani's ADAG on February 8, 2005 - Reliance Energy Ventures (REV) and Reliance Capital Ventures (RCV) - with Reliance Energy Limited and Reliance Capital Limited (that were managed by Anil even before the formal split) has left the average retail investor totally confused.

Most small investors are uncertain about the shares they have received after the split and what to do with the new shares of ADAG companies allotted to them.

There have been media reports about small some investors selling the shares of Reliance Energy Ltd and Reliance Capital Ltd on the mistaken belief that the shares of REV and RCV transferred by RIL to their demat accounts were the same as Reliance Energy and Reliance Capital shares. They were unable to give delivery for these shares, as they are not the same and the proposed mergers between them have not yet happened.

REV and RCV are holding companies which hold equity stakes in Reliance Energy Limited and Reliance Capital Limited respectively. REV and RCV have no other businesses and their values can be directly arrived from the value of their holdings in the two operating companies, Reliance Energy and Reliance Capital.

Since only the two operating companies (REL and RCL) are listed on the exchanges, the values of REV and RCV can be directly calculated from the current market prices of Reliance Energy Limited and Reliance Capital Limited.

100 shares of REV = 7.5 shares of REL
The holdings of REV in Reliance Energy are equivalent to 7.5 shares of Reliance Energy for every 100 shares of REV. Based on the closing price of Rs 599.85 of Reliance Energy Ltd on Wednesday, every share of REV is worth Rs 44.99.

100 shares of RCV = 5 shares of RCL
Similarly, the holdings of RCV in Reliance Capital are equivalent to 5 shares of Reliance Capital Ltd for every 100 shares of RCV.  Based on Wednesday's closing price, every share of RCV is worth Rs 22.04 per share.

Now, both REV and RCV are proposed to be merged with Reliance Energy and Reliance Capital. Shareholders of REV and RCV would receive 7.5 shares of Reliance Energy Ltd and 5 shares of Reliance Capital Ltd for every 100 shares held by them. Therefore, after the proposed mergers are completed, shareholders would hold the shares of Reliance Energy Ltd and Reliance Capital Ltd directly instead of through REV and RCV respectively.

Since the merger ratios are exactly in line with the holdings of REV and RCV in Reliance Energy Ltd and Reliance Capital Ltd respectively, the mergers do not make any material difference to shareholders.

Sell now or later?
The only issue that concerns shareholders is whether to exit REV and RCV immediately on their listing or wait for their mergers between REL and RCL respectively.

For an answer, investors have to decide how they expect Reliance Energy Ltd and Reliance Capital Ltd to perform in the future. If they are positive on the prospects of these two companies and the overall health of the markets, then stay invested. If not, sell-off after REV and RCV are listed.

The other two companies in the ADAG fold, which were transferred by RIL to it - Reliance Communication Ventures and Reliance Natural Resources are more difficult to value because of the various issues and controversies surrounding these companies.

The complete details of the financials of Reliance Infocomm and Reliance Telecom, the two operating companies under the Reliance Communication Ventures fold, are not yet available. Though it is widely accepted that the company would be valued at a discount to the valuation enjoyed by industry leader Bharti, there is no consensus about the extent of the discount.

Considering the growth potential of the domestic telecom industry and assuming that corporate governance standards would improve in the future, it may not be a bad idea to hold on to Reliance Communication Ventures. In the unofficial grey market, the shares of this company are reportedly quoting between Rs 240 and Rs 280 per share.

Reliance Natural Resources (RNRL) has entered into natural gas purchase contract with Reliance Industries. The company would receive up to 28-million cubic metres of gas from RIL at a discounted price. RNRL would also have the first right of refusal for buying 40 per cent of the production from the already discovered gas reserves of RIL, at market prices.

ADAG argues that RNRL should have the right to buy 40 per cent of all future discoveries by RIL, instead of just the existing reserves as per the agreement signed last month. Shareholders would have to wait to see how this issue would be resolved.

It may be worthwhile for shareholders to hold on to RNRL till the dispute on gas rights is settled. The stock was earlier expected to trade around its face value of Rs10 on listing. But RNRL is attracting a considerable interest in the grey market and is reportedly trading above Rs 20 per share.