At the latest board meeting, it was said that the sweat equity option acquired by Mukesh did not involve infringement of any laws or regulations. But Mukesh had annulled this equity stake worth Rs 50 crore in the run-up to the board meeting.

In this backdrop, the RIL board at its latest meeting decided to constitute a committee of six independent directors, which will arrive at a fair price and determine the right timing for conversion. This seems intended to buy time for Mukesh and other promoter affiliates who hold a substantial equity stake in Reliance Communications Infrastructure (the holding company of Reliance Infocomm). From the point of view of RIL shareholders, it is only fair to demand that the preference shares be converted at par, as suggested by Mr Anil Ambani as the brunt of the financial and operational risks has been borne by RIL. By doing so, the RIL holding in Reliance Infocomm will go up to 75 per cent from 43 per cent. By leaving it to a Committee, there is a distinct possibility that conversion pricing will lead to RIL ending with even less than 51 per cent equity in Reliance Infocomm.

Buyback, a poor choice

Early last week, the RIL board chose the open market buyback route through stock exchanges fixing a maximum price of Rs 570 per share and an aggregate amount of Rs 2,999 crore for the purpose. From academic literature, it is clear that buybacks using the tender offer route sends the most credible and powerful information signal, while open market buyback through stock exchanges have the least signalling effect.

Basically, by design, open market buybacks are not firm commitments, and hence are left entirely to the discretion of the management. As RIL did not pick up a single equity share during its last buyback programme, which was open twice for nearly a year each in 2001 and 2002, its credibility is low. Buyback was not the only option before the RIL board. It could have easily considered three other initiatives to correct under-valuation in the stock:

An assurance from the board that the equity of RIL in Reliance Infocomm will remain above 51 per cent at all times could have worked well for the RIL stock. The value of the integrated telecom business (including mobile) has not been fully impounded in the valuation of RIL.

With this assurance and given the fact that Reliance Infocomm is conservatively valued between Rs 20,000 crore and Rs 40,000 crore, there would have been a re-rating of the stock.

Clarity on the relationship with Reliance Energy could have cleared this uncertainty among investors, both in RIL and Reliance Energy, affecting valuation to a large extent.

To improve corporate governance practices, RIL has appointed Mr Y. P. Trivedi and Mr M. P. Modi as independent directors representing RIL in Reliance Infocomm and Reliance Communication Infrastructure.

Instead of appointing the existing independent directors, RIL could have, to infuse greater confidence, considered broad basing the existing base of six independent directors (most of them long time associates of the group) in a 12-member board, by inducting more directors.

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