Why is RIL opting for share buyback?

Mukesh Ambani-led Reliance Industries (RIL) is mulling a share buyback programme that its board will consider on January 20.

Even as the RIL scrip soared 4.94 per cent to Rs 776.90 apiece after the announcement, the Sensex remained flat, falling 14.58 points, or 0.09 per cent, to 16,451.47.

These are the four ways a company can buy back its shares:
 
1. From the existing shareholders on a proportionate basis through the tender offer;
2. From open market through:
a. Book building process
b. Stock exchange
3. From odd lot holders.

(Here is a Sebi FAQ: http://www.sebi.gov.in/faq/buybackfaq.html)

The last time RIL did a buy back, in 2004, it provided a 10 per cent premium on previous day's price and was an open market operation through the stock exchange (ii, b). The fund set out was around Rs 2,999 crore and ultimately only Rs 149 crore or so was used.

Jagannadham Thunuguntla, the head of research at SMC Global Securities feels that with Rs 85,000 crore cash on its books, the company is well placed to do a 10 per cent buyback, which will need around Rs 14,600 crore at a 10 per cent premium to current price.

But RIL may decide to conserve the excess cash for future investments,Thunuguntla felt.

The question then is - why this buy back? Is RIL trying to reward its shareholders - by giving some money back out of its cash hoard? Or is it just trying to support the stock price?

According to Raamdeo Agrawal, joint managing director of Motilal Oswal Securities, holding on to cash is an Indian practice where promoters are not willing to reward shareholders and at the same time are not deploying the money that is supposed to be risk-capital, seeking high returns.

The answer to this question will determine how Reliance plays this. Will it be seriously picking up shares through a pro-rata offer, or, whether it will be just playing the markets, create a demand and support the stock?

If RIL wants to reward shareholders, it would make a tender offer to all shareholders to pick up 10 per cent of their holdings.

For now, all eyes are on the board's January 20 meeting.