Reliance may use buyback to extinguish treasury stocks

by FP Editors Jan 18, 2012

Reliance Industries’ move to buy back its own shares is widely seen as shareholder friendly, but there could be other motives behind the action. The board will consider the buyback plan on 20 January. Reliance is among a handful of companies in the country which hold a huge chunk of their own shares, the others being Mahindra & Mahindra, JP Associates, United Spirits, BPCL and IOC.

Reliance Industries, CMD, Mukesh Ambani. Reuters The company holds around 9 percent of its shares, which are termed as treasury stock (generated through mergers and acquisitions), owned through various companies shown in the table below. These treasury shares were created at the time of Reliance’s merger with Reliance Petroleum. All Reliance shares held by Reliance Petroleum were converted into treasury shares and were parked in an entity named Petroleum Trust, which presently holds 3.68 percent of Reliance. At the time of its creation it held 7.2 percent. Reliance has been selling these shares in the open market to comply with the IFRS (International Financial Reporting Standards) regime. Under IFRS, which is likely to be implemented after 1 April 2012, treasury share sales will not be counted as profit or loss. At present, companies can recognise profit and loss when

they sell treasury shares under current Indian accounting standards. But under IFRS, such sales of treasury stocks will be considered as fresh capital issuances, leading to an increase in share capital. Companies with treasury shares would have missed the earlier deadline of 1 April 2011 had it not been for Murli Deora, who, when moved from the petroleum ministry to the ministry of corporate affairs, extended the deadline by a year.

Kotak Securities, in its report on Reliance, had suggested that the share price of the company can get a boost if it goes in for a buyback to utilise its huge pile of cash. The report also suggested cancellation of treasury shares held by the company, which would result in the company’s EPS (earning per share) increasing by 9.8 percent. Cancellation of treasury shares would have resulted in outstanding shares of the company coming down from 327.3 million shares to 298.1 million shares. Reliance has announced only the share buyback and has stayed away from cancellation of its treasury shares, but it can use the buyback mechanism for cancellation of shares. With just over two months left to comply with the IFRS regulation, the company can use the buyback route to purchase its own treasury shares apart from the residual shares that the company can get from the market. Under the current law, apart from promoters, everyone else can submit shares in a buyback scheme, including the company holding its treasury shares. At Wednesday’s closing price of Rs 779.75, the treasury shares are worth over Rs 22,000 crore. For Reliance shareholders, it is a good move if the treasury shares are submitted for buyback. The funds generated by the sales would effectively belong to Reliance even while the shares are extinguished (cancelled). This way the total number of shares will come down and profits per share will rise.

Reliance raises Rs 3500 cr via treasury shares sale; stock down
ET Bureau Jan 11, 2010, 09.49am IST

MUMBAI: Shares of Reliance Industries were under selling pressure on Monday after the company raise Rs 3500 crore by selling 33 million treasury shares in block deals on the NSE. According to ET Now, the company sold 28.9 million shares at Rs 1089 per share and remaining 4.1 million shares were sold at Rs 1057 per share. This deal is said to be the highest block deal in terms of value. 5 new long only funds from Asian and Europe have bought the shares. UBS was the sole arranger for the deal. At 9:41 am, the stock was at Rs 1090.65, down Rs 11.30 or 1.03 per cent. It touched a low of Rs 1066 and high of Rs 1184.70 in trade so far. On the NSE, the scrip was at Rs 1089.40, down Rs 13.75 or 1.25 per cent. The stock touched a low of Rs 1050 and high of Rs 1149.70. Reliance Industries, a week ago, sold a part of its treasury stock for Rs 2,675 crore to LIC. Analysts are of the view that the company is raising funds for its proposed acquisition of LyondellBasell, the Netherlands-based petrochemicals company.

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