Gas, Government and Institutional Investors

The ruling by India's Supreme Court on Friday, ended the five-year long dispute between two rival firms owned by the Ambani brothers. The verdict may have caused far greater pain for the loser than gain for the winner.

The loser: Reliance Natural Resources (RNRL), a shell company that would have made big profits in the future, only if the SC had ruled in its favor. RNRL's stock crashed 23% on Friday and dropped another 9.5% on Monday morning.

The winner: RIL, India's largest company by Mcap.

 

Now, this is not our story. We will look at the bets placed by the so-called smart investors, or the institutional funds, on the climax of this high-profile case. India's domestic institutional investors - including the state-owned insurance behemoth Life Insurance Corp, the largest equity investor in Mumbai's markets - was steadily trimming exposure to RNRL since June 2009. As you can see in the chart below, some gullible foreign funds were gobbling the stock during the same period. 

RNRL stock ownership - last four quarters: DII - Domestic Institutional Investors, FII: Foreign Institutional Investors. source: Bombay Stock Exchange

This is where the DIIs re-allocated the capital. Gail is India's state-run monopoly in natural gas distribution.

Here is the past 1-year performance of Gail. Smart play!

And this is another stock that the DIIs accumulated in the past year, while FIIs continued to dump.

 

RNRL had locked horns with two Goliaths: India's government and its largest private corporation. In the second-half of 2009, Reliance ADAG, RNRL's parent, launched an aggressive campaign against India's Union Ministry of Petroleum and Natural Gas for allegedly joining hands with Reliance Industries for the benefit of state-run National Thermal Power Corp (NTPC). The campaign, advertised on all "mainstream" national newspapers, was the first of its kind in the country. It became an instant controversy and prompted both RIL and the government to react. 

The intensely dramatic, five-year long dispute finally ended without any surprise. But yes, some cowboy fund managers still lost money.