The Hindu Business Line : The largest buyback that never was

The buyback was priced at Rs 303 per share and the company set apart Rs 1,100 crore for this purpose. This was supposed to be an initiative of the promoter group to reward shareholders. The late Dhirubhai H. Ambani had announced at the company's AGM on June 24, 1999, that a suitable portion of the company's cash flows would be utilised for implementing a share buyback programme. The proposal came a year later when the equity base was Rs 1,053 crore.

The buyback through the secondary market was open between August 2, 2000 and May 18, 2001. During the period, the stock had traded at below the proposed price only on 11 out 264 trading sessions. The company extended the offer to cover a period between July 2001 and June 2002. During this period, too, the buyback remained an exercise on paper even though the stock slipped below the buyback price as equity markets and commodity cycles were on a lacklustre mode. The price declined to as low as Rs 226 in September 2001, recovered to move past the Rs 303 level and then again slid and traded below that level in May and June 2002. But the company did not enter the market to implement the buyback programme though it would have offered shareholders a higher exit price.

Interestingly, Mr Anil Ambani, the present Vice-Chairman and Managing Director, had in April 2000 outlined in detail the objectives of the programme as an exercise to:

manage stock price volatility lower the beta of the stock and attract long-term investors into the company;

return money to shareholders in large measures in a tax efficient and investor friendly fashion without sacrificing growth opportunities and enhance the company's overall global competitiveness;

improve financial parameters such as return on equity; reduce floating stock, enhance long-term price performance and enable the use of RIL stock in the long term as currency for acquisition;

achieve a re-rating for the RIL stock by sending a powerful signal on the perceived undervaluation from time to time and increase in the company's market capitalisation contribution to maximise shareholder value;

send a clear signal to Reliance investors that they would be rewarded by return of cash, protect the interest of long-term shareholders by neutralising the impact of speculative forces; and provide them a floor price.

During the one week preceding the announcement in 2000, the Reliance stock had outperformed the Sensex by about 40 per cent. But the company indicated that despite consistent financial performance, the price earnings multiple of the stock was only 66 per cent of that of the basket of Sensex stocks. During the 20 trading days preceding the announcement, the stock had moved in the range of Rs 199 and Rs 335.

In 2001, when the buyback was extended, Mr Anil Ambani had said: "Reliance views share buyback as a long-term measure to enhance overall shareholder value and not a mechanism to artificially support any particular price level for the company's share or to respond to short-term speculative pressures.'' But now the circumstances are different.

If the stock has under-performed the Nifty and the Sensex in a bullish phase, it is attributable solely to company-specific factors - more precisely, the squabbles between Mr Mukesh Ambani and Mr Anil Ambani on "ownership issues".

The proposal also comes at a time when there are serious questions about the funding of Reliance Infocomm by Reliance Industries - an aspect that Mr Anil Ambani has been highlighting, if media reports are any indication, as the brothers' battle has taken centrestage. The proposed buyback may be perceived as an exercise by the Mukesh Ambani group to ensure that the stock price does not take a knock.

None of the impressive list of objectives outlined by the company in 2000 appears to be at the core of the plan to consider a buyback programme now. It is likely that the board may fix the buyback price at a level that could provide a floor. But if the spat continues and newer and more damaging details of financial transactions between group companies and governance emerge, even a buyback programme may not be an adequate protection on the downside.

At the board meeting on December 27, it would be interesting to observe what stance Mr Anil Ambani, who had made a passionate case for the buyback proposal in 2000 and 2001, takes given the sea change in the equations with his sibling.