Reliance share buyback: Will it make stock market history?

The excitement is palpable. The board of Reliance Industries, India’s biggest company by market capitalisation, is set to consider a share buyback proposal today (it will also report its third-quarter results).

On Wednesday, just the announcement that the board is meeting on Friday to consider the proposal sent the company’s shares soaring more than 6 percent. Today, the stock is down a marginal 1 percent at Rs 778.

Here are five things you need to know about this key corporate event:

[caption id=“attachment_188385” align=“alignleft” width=“380” caption=“Flushed with cash, a big day for Reliance. Reuters”] [/caption]

**One,**this buyback could possibly be the biggest share buyback in Indian stock market history. Jagannadham Thunuguntla, head of research and strategist at SMC Global Securities, estimates the buyback programme could be anywhere between Rs 10,000 crore and Rs 15,000 crore, according to this CNBC TV18 report.

Two, the price of the buyback is likely to be set between Rs 800-900 per share, according to market experts. In theory, a share buyback reduces the supply of shares in the market. If the shares are extinguished, total capital reduces, which improves profits per share. The share price gets a boost as well. A_Firstpost_ report also pointed out that the buyback might be used to extinguish Reliance’s own shares, termed as treasury stock (generated through mergers and acquisitions).

If the board gives its go-ahead today, the actual buyback is expected to start sometime in February.

Three, most experts believe the buyback is being initiated to cushion the stock price, which has taken a severe battering in recent times. Reliance’s shares lost 34 percent in 2011, hit by concerns over slowing gas output from the KG-D6 basin and valuation worries over still-to-be-explored energy assets; in contrast, the Sensex slipped 25 percent.

“This buyback announcement will be a strong statement from Reliance that they feel the current share price is undervalued compared with what they believe is its intrinsic worth,” Thunuguntla told AFP. It might also revive foreign institutional interest in the stock once again, according to other experts.

**Four,**the company certainly has the cash to implement a mega buyback programme. At the end of September, the company had more than Rs 61,000 crore on its books. Add to this the $7.2 billion the company received from BP, and the cash rises to Rs 97,000 crore. Kotak Securities expects the company to generate Rs 88,000 crore in gross cash flows over the next two years.

In fact, when the stock breached Rs 700 over the year-end, Firstpost had reported that “for a company sitting on Rs 300 in hard cash per share, a share price of Rs 700 means investors are getting a share of its business for Rs 400.”

With no great investment opportunities on the horizon, a buyback of shares was perhaps the only option to get a fair share vaue.

Five, this is the company’s second buyback programme in recent times. The company last announced a share buyback programme in December 2004. The size of that buyback was Rs 2,999 crore , equivalent to about 10 percent of the share capital plus free reserves at the end of March 2004, according to Business Line. However, the company only bought shares for nine days for about Rs 150 crore, equivalent to 5 percent of the buyback programme.

Under current regulations, it is not mandatory for a company to buy shares up to the maximum limit of its buyback programme.