The Hindu Business Line : Buyback price — A hint by Reliance to show that its shares are undervalued

THE decision of the board of Reliance Industries Ltd (RIL) to put through the buyback proposal using the open market purchase route through the stock exchanges is largely on expected lines.

The latest decision has a three-fold implication:

The maximum price of Rs 570 fixed by the RIL board for open market purchases is only an indicative price for buyback.

On RIL's part, it is only using this price as a signalling device to indicate to the stock markets that its shares are undervalued. And it is hoping that this signal will be automatically picked up by the market and its shares will be pegged closer to the maximum price.

On the contrary, if the stock price remains subdued at levels considerably lower than that price, the company retains the option of stepping in and buying shares from any shareholder at any price up to the maximum price of Rs 570.

Let us take the example of another company that put through an open market buyback recently, Mastek Ltd. Even though it had set a maximum price of Rs 320, the highest price at which it bought back shares were Rs 298 and the lowest price was Rs 258.50 per share, and the average price at which it bought back shares was Rs 273.36 per share.

From a shareholders perspective, it is important to note that under the open market purchase route, RIL is under no obligation to buy back equity from the shareholders.

If the past is anything to go by, the RIL board had announced the largest buyback programme in history in April 2000 at a maximum price of Rs 303 per share. This open market buyback (akin to the latest one) was open twice for nearly a year each in 2001 and 2002.

But the company did not buy a single share, even though the price had dipped below Rs 303 on quite a few occasions.

The amount of Rs 2,999 crore only represents an aggregate limit up to which buyback can be made by RIL, arrived at based on 10 per cent of the company's paid up equity and free reserves as of March 31, 2004. And this amount will be utilised by RIL only if the open market purchase is made to the full extent.

Even in the earlier April 2000 buyback, the company planned to buy back shares worth Rs 1,100 crore.

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