Beaten on Street, Reliance Lines up Share Buyback Stock surges 5% as RIL says board will consider Indias biggest

buyback plan tomorrow OUR BUREAU MUMBAI

Cash-laden Reliance Industries rekindled a buying frenzy in its falling stock, announcing its board will meet on Friday to consider a proposal to buy back shares. The stock leapt almost 5% on Wednesday, increasing shareholder wealth by . 11,950 crore to . 2.54 lakh crore. The scrip had fared worse than the BSE Sensex, losing over a third of its value in 2011 when the benchmark index lost 25%. The Reliance Industries (RIL) scrip also regained its pole position in the Sensex on Wednesday, pipping Infosys. RIL now represents 10.27% of the index, with its share price closing at . 776.90. If the board clears the proposal, RILs buyback, coming after seven years, may rank as the biggest in Indias stock market history. Market sources anticipate the company to commit . 10,000-15,000 crore in the buyback. Sebi guidelines allow companies to buy back shares worth up to 10% of their paidup capital and free reserves without a shareholder resolution. This can go up to 25% with shareholder approval. What this buyback means is that the management is not happy with the prevailing share price and/or is keen to return money to shareholders, Sanjeev Prasad, cohead, Kotak Institutional Equities, said. The quantum of funds set aside for the buyback will be a crucial factor for the stock price. It has to be a significant corpus for investors to take notice, the analyst, who has tracked RIL closely and critically for several years, added. RIL had announced a . 3,000-crore buyback programme in 2004-05, but bought shares only for . 150 crore. This time, to communicate an honest intent to return substantial cash to investors, RIL needs to come out with a meaningful offer and follow through with actual buyback, said Jigar Shah, senior vice-president and head of research at Kimeng Securities India. Current laws ensure that a company spends at least 25% of the announced offer size, that too within 35-45 days. RILs cash balance was . 61,490 crore as on September 30, 2011. What the Markets will be Watching Buyback Price: If the board clears the buyback, it will also announce a maximum price up to which it will buy back shares. This will influence the markets

Proposed buyback corpus Anything less than Rs 10,000-15,000 crore may disappoint the market. RIL could set aside as much as Rs 15,000 crore (without shareholder approval) and Rs 25,000 crore (with shareholder approval) for the buyback Actual buyback amount Companies need not spend all the money they have set aside for the buyback. But the more RIL spends, the stronger the signal it will be sending to investor RIL's previous buyback The company had bought back and extinguished 28.69 lakh shares in Q4 of FY2005, reducing equity by 0.2% from 1396.38 crore to 1393.51 crore Assuaging Investor Sentiments Since then it has received a $7.2 billion up-front payment from BP as part payment of its deal to sell a 30% stake in 21 exploration assets, including the KG-D6 block. It is also entitled to get $1.8 billion more depending on future exploration success. RILs net debt-toequity ratio stood at 0.06 in September, indicating the total outstanding debt was only slightly higher than the cash balance. The buyback is seen as an attempt to assuage investor sentiments as Mukesh Ambani and his team try to solve a peculiar conundrum where existing businesses are spewing out far more cash than what the company can invest in existing or new businesses. Idle cash pulls down shareholder returns and is seen as one reason for the scrips poor performance in 2011. After completing its two mega projects development of the KG-D6 block and the second refinery at Jamnagar the companys cash-earning capacity has improved substantially. In the last two financial years, FY10 and FY11, RILs cash flows from operations have remained higher than its capital investments, according to its audited consolidated cash-flow statements.