The Hindu Business Line : Reliance holds Rs 12,000 cr worth of its own stock

ABOUT 17 crore shares of Reliance Industries worth Rs 12,000 crore in value are held by certain entities, according to the company, for the collective benefit of the shareholders. These entities would not, however, be receiving shares that would be issued consequent to the demerger of the company's investments in telecom, energy and financial services businesses.

The company had on Friday last, announced that its investment in Reliance Infocomm, Reliance Energy and Reliance Capital and gas and oil transportation would be demerged to form four specific companies.

The shareholders of Reliance industries would be allotted shares in these new companies in proportion to their holdings in the company in the ratio of 1:1. But the company has said that it would not however be issuing any shares in the new ventures for the shares held by certain entities.

These entities ended up owning shares in the company consequent to the restructuring exercise involving companies within the Group at various times in the past.

For instance, Reliance Petroleum Trust owns 10.5 crore shares in the company. The entity was created at the time of merger of Reliance Petroleum with Reliance Industries. The trust warehouses shares that Reliance Industries held in Reliance Petroleum and was allotted to Reliance Industries shares as per the swap ratio for the merger. There were other entities, which too ended up owning shares in Reliance Industries consequent to such restructuring exercise undertaken in the past.

The company has contended that non-allotment of shares in the latest demerger exercise would not in any way undermine the wealth of the company's shareholders in these ventures. Evidently the company seems to argue that the wealth embedded in the telecom, energy and financial services business now stands distributed across fewer number of shares held by Reliance shareholders.

If these holdings had also been demerged, the value of stock distributed to shareholders would have worked out to nearly Rs 89 per share of Reliance Industries based on the latest market price.

Assets worth nearly Rs 20,000 crore are to be transferred out of the fold of Reliance Industries to its shareholders to give effect to the demerger.

The transfer of assets necessitates a fall in stock price of Reliance Industries after the record date. The record date will determine the shareholders eligible to receive shares of the demerged entities.

For an investor buying at Rs 725, the stock price of Reliance Industries should list, post-demerger, at least at about Rs 550 for the exercise to unlock value to the shareholders.

This price has been arrived at after considering the prevailing market price of Reliance Industries, Reliance Capital, Reliance Energy and a valuation of Rs 25,000 crore for Reliance Infocomm.

The calculation is based on the swap ratios announced by Mr Anil Ambani.

These swap ratios could however be subject to change. At Rs 550, the price to earnings multiple of the relatively `asset-light' and `debt-heavy' post-demerger version of Reliance Industries would be about 10.

This is worked out considering only the earnings of the petrochemical and refining divisions of Reliance Industries in the 12-month period ended June 2005.

The market capitalisation of Reliance Industries will also dip to about Rs 75,000 crore at Rs 550 a share.

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