I wrote a detailed article yesterday about the political side of the controversy surrounding India’s most important company Reliance Industries. Today I am writing to give investment advice to the stock market investors including foreigners in the company’s stock.

RELIANCE INDUSTRIES – NOTWITHSTANDING CAG REPORT CONTROVERSY, INVEST FOR MEDIUM TERM AT PRICE BELOW Rs 900

Stock price of Reliance Industries is on the decline after the CAG report that the government of India had deliberately favoured the company at its cost. This is bound to raise many controversies in the coming months. Many heads are bound to roll. Naturally confusion will arise in the investors’ minds as to whether they can hold their shares in the company or should get out of the stock even at a loss. Investors may also get confused about whether to enter into the company’s shares fresh at this stage and at this price. Let us examine these issues in detail.

First of all, the government is unlikely to admit that it had incurred any loss in KG D6 award to the company for digging oil wells. In the 2G spectrum scam, Kapil Sibal stated that the government had not incurred any loss at all. Similarly Sonia Gandhi may ask Kapil Sibal again to state that there is no loss to the exchequer in this matter also. Kapil Sibal is one Minister who will readily oblige such a request. The government may say that CAG’s suggestions cannot be implemented in the high risk oil exploration business and that if it drives too much, private sector may be reluctant to enter this arena. The government will try to close this matter as early as possible but the opposition parties BJP and the Left will not allow the matter to settle down as easily as this has given them another golden chance to embarrass the government. Therefore this controversy will live on in the minds of the people for quite some time. Media will also try to blow up the matter. Here there are two kinds of media – one that is favourable to Reliance Industries and the other that is hostile to the company. The voice of the media that is hostile to the company will prevail ultimately.

The stock has fallen by over 6% in the last one year. In the same period, Sensex and Nifty have gained by over 7%. But despite this dismal performance of the stock, institutional investors, mutual funds and government institutions have increased their holdings in the company during the last six months by Rs.1500 crore. Total institutional holding in the company is at 23.48%. The market capitalisation of the company is at a whopping Rs.309010 crore – which means total institutional holding is at Rs.72500 crore. The principal government insurance company Life Insurance Corporation of India (LIC) has increased its holding in the company to 7.92%. Foreign Institutional Investors (FIIs) have 17.45% holding in the company. These institutions will not easily sell their holdings in the company as that might trigger a stock market collapse which will cause a widespread damage to the wealth of the institutions as well as small investors. Therefore the scam will have only a little impact on the share price movement of the company unless opposition parties dent a bigger hole into the affairs. But chances of the company’s shares dropping below Rs.900 are bright in a few weeks time.

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