Reliance Industries declared an Initial Public Offering (IPO) in 1977. (Through Initial Public Offer (IPO) a company gets public and can trade its shares on the stock exchanges). The share price was set at Rs.10 each and total amount of 2.8 billion through equity shares were announced.
Within a year the share price reached Rs.50 per share which continuously kept increasing, leading to Rs.104 in 1980 and then to Rs.186 in 1982.
In 1982, the rights issue for partly convertible debentures was announced by the company. (In partly convertible debentures money is borrowed from public at a fixed interest rate for a fixed period of time after which the debentures get converted into shares.)
Before the rights issue could take place, the bearers of the shares thought that the company is artificially keeping the prices high to ensure full subscription to the rights issue.
As a result bearers started ‘short selling’ of the shares. Short selling is a technique in which the sellers sell the shares at a fixed amount even when they actually don’t have the shares.
Short selling of these share was according to the expectation that when the prices of the share will go down, they themselves will buy the shares from somewhere else and then will deliver the shares to the buyer(to whom they have sold) at previously fixed price. So the difference will be their profit.
Note: In those days (1980s) this was possible because at that time delivery of shares had to be done after 14 days, so the seller had enough time to deliver the shares and in the mean time they buy it from somewhere else at low price. But nowadays the rules have changed. It is now T+2 days.
A buying wave began. Some NRI investors in Western Asia started buying these shares, more the no of shares available more these investors were buying. The foreign investors invested around 100 millions in buying Reliance shares.
Again, in those times there was a tradition of ‘undha badla’ (the sellers had to pay certain amount to the buyers if they were not able to deliver the shares on time as penalty).
When the time came to deliver the shares to the NRI investors then the sellers started looking for the shares in the market which by that time had already become a scare resource in the market. On top of that the foreign investors started demanding ‘undha badla’ for late delivery. It is rumored that this NRI investor was no one other than Dhirubhai Ambani.
There was a demand of Reliance Shares but little Supply.
It was believed that the major supplier of shares to the market during that period was Dhirubhai Ambani. He, by routing his shares through the bearers, extracted a handsome penalty through price difference. The bearers bought the shares from the Dhirubhai Ambani and again sold them back to him at a lower price with addition of penalty.
This is an example of Dhirubhai Ambani’s shrewdness and this made Dhirubhai Ambani the successful person as he was.