The Anil Dhirubhai Ambani group-promoted Reliance Energy Ltd has proposed a buyback of its shares. The management has not stated any particular objective for buyback, but a press release said it has convened a board meeting on March 5, to consider the proposal.
The move comes just two days after Reliance Power, another group company in which REL owns 45 per cent, offered bonus shares to its shareholders in the ratio of 3:5.
According to industry watchers, one reason for the buyback could be to keep the share price from falling. The REL stock has lost about 36 per cent from its peak of Rs 2,631.70 in January and it currently trades at Rs 1,697.25.
Typically, managements initiate a buyback if they believe their companies' shares are undervalued and that the market price does not reflect the fundamentals. By supporting the stock price at a certain level, the company can absorb any selling by investors, they point out.
Buyback options, however, require spare cash. The company's reserves and surplus were approximately Rs 9,000 crore at the end of March 2007.
Going by the market regulator's rule that companies can invest up to 25 per cent of their reserves on share buybacks, the amount spent on acquiring the shares could be in the region of Rs 2,250 crore.
The Rs 6,575-crore power utility was sitting on cash and cash equivalents of approximately Rs 7,500 crore, according to the balance sheet for March 2007.
REL had consolidated cash and bank balances of Rs 2,226.33 crore and quoted investments of Rs 4,446.33 crore, the market value of which is mentioned as Rs 4,550 crore. It also has some additional investments.
However, the cash and cash equivalents could be higher at about Rs 10,000 crore, as at the end of December 2007, assuming some infusion of funds by the promoters and a rise in the value of investments.
REL's paid-up equity as of March 2007 is Rs 228.57 crore and has increased to Rs 236.53 crore as on February 4, 2008, with the conversion of some foreign currency convertible bonds into shares.
REL's subsidiary, Reliance Power, raised about Rs 11,000 crore through an initial public offer last month at a price of Rs 450 per share and Rs 430 per share for retail shareholders.
The promoter and promoter group hold 34.68 per cent in REL, with the majority 34.04 per cent with Anil Ambani's AAA Project ventures Pvt Ltd.
While Anil Ambani's personal holding is just 0.06 per cent (139,437 shares), his son Jai Anmol A Ambani and wife Tina Ambani hold 0.05 per cent each, according to the shareholding information given to the stock exchanges as in December 2007. Institutional investors hold 44.74 per cent in REL.
While announcing the bonus shares for Reliance Power, Anil Ambani had said he would transfer 2.6 per cent of his personal holdings in Reliance Power to REL, worth Rs 4,200 crore.
This move was to allay concerns that the shareholders of REL would suffer because the bonus issue was restricted only to non-promoters of Reliance Power.
Recently, fast moving consumer goods major Hindustan Unilever completed its buyback of shares, spending Rs 626.28 crore picking up and 30 million shares at an average price of Rs 207.13 per share.