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On Sunday, the Reliance Power Board approved a bonus issue of 3:5 shares, which essentially means that the company will issue 3 shares for every 5 held. Chairman, Anil Ambani said that the bonus share issue is only for non-promoters. The company said that the number of retail shareholders have increased in the last 10 days. The bonus is said to reduce IPO cost to Rs 269 for retail investors, to protect dilution of REL stake in Reliance Power. REL will be compensated by making up 2.6% from Ambani's own stake.

Ambani said that his personal stake in Reliance Power has been diluted to 40% versus 45%. He added that the public will hold 15% in Reliance Power.

There are two possible scenarios for retail investors to exit pre and post the Reliance Power bonus. One is to sell before the bonus itself or wait for the bonus to hit the markets.

If they sell before the bonus - let’s say if price touches about Rs 450 and the cost of acquisition per share is about Rs 430, they were making a profit of Rs 20 on each share and most of them are allotted about 15 shares. So net income profit is about about Rs 300.

But if you take a scenario of post bonus issue, one of the unknown is out of the question - which is the bonus issue. Now, one has to have a fair assumption of what the fair price is going to be. Let's assume that the fair price is about Rs 350, pre-bonus issue. Thereby post-bonus issue, the price will come to around Rs 330. Thereby the profit - on a per share basis the profit is going to be Rs 61.

So if assuming somebody has got allotment of 15 shares, the number of shares will go to 24. So 24 multiplied by 61 would give a profit of about Rs 1460. If you assume that the fair price is Rs 300, then the market price is going to be around Rs 283, which is about 14% profit per share - that will come to around Rs 330 or Rs 336.

So people have to fairly assume the fair price and then see whether they want to sell it right now or whether they want to sell it after the post-bonus issue. But the cut-off price for somebody to make a profit on this particular stock, is Rs 285 on a current market price basis.

Should you exit pre-bonus or post-bonus?

Pre-bonus exit
-If price touches Rs 450,retail investor profit at Rs 20/sh
-For 15 shares, total profit made at Rs 300

Ex-bonus Exit
a) For Rs 350 pre-bonus price, retail investor profit at Rs 61/sh
-For 24 shares, total profit made at Rs 1,464

b) For Rs 300 pre-bonus price, retail investor profit at Rs 14/sh
-For 24 shares, total profit made at Rs 336

c) For Rs 285 pre-bonus fair price should be the cut off to avoid losses

Source: Moneycontrol.com