The propriety of receivables transferred by Reliance Infocomm to a group company and the issue of proper disclosures on investments made so far in Reliance Infocomm will come up for debate on December 27.

The issue of preference shares to RIL at a premium, even as Mukesh was allotted sweat equity at a face value of Re 1 has been a subject matter of controversy. The sweat equity has, however, been given up by Mukesh since.

Though the price fell substantially below Rs 303 several times during this period, the company did not step in to pick up a single share.

The only inference one can draw is that the RIL management used the open market buyback only as a psychological prop to keep the shares pegged at a higher level, without any intention of offering a higher exit price to shareholders.

Seen in this backdrop, any buyback programme undertaken by RIL management after settling the family feud and resolving the simmering corporate governance issues will carry greater conviction with the shareholders than otherwise.

Tender or open market?

Since RIL has already announced the buyback proposal, the debate has shifted to a more crucial aspect: What `method' will be chosen by the RIL board on December 27? Going by the SEBI's Buyback

Regulations, the RIL board has primarily two options — `open market using the stock exchanges' or `tender offer using a fixed price'.

Though there is a third option called `buyback using the book building process', used typically in an IPO, this has hardly been used by companies so far. Obviously, linked to this will be a decision by RIL on the price and size of the proposal.

Prefer open market route

Between the two methods of buyback, from an RIL shareholder perspective, the tender offer using a fixed price will any day be a better option.

Largely because this route spells out the intention of the company management in no uncertain terms and in most cases, the exiting shareholders realise a substantial premium (comfortably above 25 per cent) to the prevailing stock price.

But in this case, in our view, the RIL board, which is calling the shots, will prefer the open market route to a tender offer, as several key elements are working in favour of the former:

Psychological ploy: In the near term, the RIL board will probably be more keen on ensuring that its stock price does not go below a certain level. Though a tender offer buyback is better suited to quickly establish a floor price of the RIL stock, this may not be preferred as it runs counter to the other elements that favour an open market buyback.

By sticking to the open market purchase, RIL will attempt a psychological ploy to prop up the RIL stock to at least the maximum price (to be decided by the RIL board on December 27) at which the buyback will be made.

Though RIL shareholders will be sceptical of the company's intentions, going by the false signalling effect created in April 2000, it is a risk they will be willing to take in the short run.

Non-committal on funds: The biggest advantage of an open market buyback is that there is no obligation on the part of RIL to buy back shares, even if the stock consistently trades below the maximum price fixed for buyback. This ensures that there is no need for RIL to commit funds for the buyback programme.

If that is the intention, the RIL management can also fix the maximum price at a high level (say, a premium of 25-30 per cent, from the current price levels of Rs 500) and hope that its ploy of pushing up prices works.

On the contrary, under the tender offer, the RIL board may have to make a fund allocation of Rs 2,500-3,000 crore, depending on the fixed price, to buy back up to 10 per cent of the equity and free reserves.

Long-drawn feud: If the feud turns out be long-drawn-out, the open market route will offer the flexibility to keep the buyback window open for a long period of time.

And the RIL management will also retain the flexibility of buying back shares at whatever price levels it thinks proper.

Whereas in a tender offer, the RIL board will have a three-month window, at the most, when the stock will rule close to the fixed tender price.

If the feud sustains beyond this period, its negative impact will obviously be felt on the RIL price, with no props available.

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