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'We would not want speculators to use Reliance as a hedge stock'

Reliance Industries announced that it will buyback its shares upto a price of Rs 303 aggregating Rs 1100 crore. Managing director Anil Ambani explains the rationale in his own words. In Real Audio.

Objectives of share buyback

From the Reliance management perspective, we have looked at multiple objectives for the share buyback programme -- managing stock price volatility, lowering the beta of the stock, to attract long-term investors into the company and to provide a floor price. The price that has been fixed by the board this afternoon is Rs 303 per share which represents a 22 per cent premium over the average for Reliance Industries over the last one year -- it's the average of the high and low.
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The management mindset

The management mindset is moving to giving capital appreciation to investor, giving them dividends, but how do you return money to shareholders in large measures... it is through buyback in a tax efficient and investor friendly fashion without sacrificing growth opportunities and within the overall capital allocation framework that we spelt out in our AGM (annual general meeting) in June 1999.

Clearly, share buyback will allow us to optimise our weighted average cost of capital thereby enhancing our overall global competitiveness, improve our financial parameters such as return on equity, reduce floating stock and enhance overall long term price performance. In the Indian regulation, shares that have to be bought back have to be compulsorily written down and those shares have to be cancelled. That clearly goes out of the system in terms of floating stock. Achieve higher all-round valuation and enable the use of RIL stock in the long term as currency for acquisition. As soon as you get a fair value for the stock, you can use that as a currency in the future as is done internationally. Achieve a re-rating for the RIL stock by sending a powerful signal on the perceived undervaluation from time to time. And achieve increase in RIL's market capitalisation contribution to maximisation of overall shareholder value. So these are some of the key objectives that the board looked at today when we made this decision.
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The Reliance stock has outperformed the Sensex

From calendar year to date as on April 11, the Reliance stock has performed 38 per cent higher than the Sensex, (in) one year timeframe (it is) 135 per cent to the Sensex, two years 21 per cent, three years 105 per cent, five years 90 per cent and ten years 409 per cent. So when you look at year to date for ten years which is a reasonable time frame for capital appreciation for equity investments, we have consistently outperformed the Sensex over all timeframes.
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RIL's undervaluation vis a vis the Sensex

I have put the data together for five years -- Reliance has traded at a discount to the Sensex P/E despite consistent financial performance. We have had a 15 per cent compounded annual growth in our earnings per share over the last five years. (RIL P/E relative to the Sensex has ranged between 43 per cent on March 31, 1996 to 85 per cent on March 31, 2000). The Sensex P/Es are based on the old Sensex. RIL's current P/E is only 66 per cent of the recast Sensex.
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Reliance will not dilute any further equity capital between now and 2003

The buyback is not to exceed 25 per cent of the equity capital and free reserves of the company which is roughly Rs 3000 crore. The buyback in any financial year cannot exceed 25 per cent of the total paid-up equity capital. Reliance's fully diluted current paid-up capital is Rs 1053 crore. Companies that are allowed to buyback their own shares cannot do anything except reduce; they must write down capital. Internationally, you have the choice to keep it as treasury stock. In India it has to be compulsorily written down.

Post-buyback, total debt-equity ratio cannot exceed 2:1. RIL's current debt-equity ratio is well below 0.9:1 -- so we are comfortable on those aspects. The company cannot make an issue of new equity capital for a period of two years from the date of the closure of the buyback scheme. So if the buyback is valid as a resolution by the AGM for one year; so you take one year plus another two years. That means you look at 2001and 2003. So Reliance will not dilute any further equity capital between now and 2003.

For the record, Reliance has not issued any capital for the last six years. So when you cumulate the six years period of the past and three years of the future, for a total period of nine years -- where Reliance has transformed itself in terms of its ability, in terms of 10 million tonnes of capacity, being a leading player, having merely a $ 9-10 billion market cap -- this has been all done without having any infusion of equity capital from the market and within the constraints of the debt-equity ratio and being very conservative at 0.9:1 debt-equity ratio in spite being in a capital intensive sector like petrochemicals.

As I said the resolution is valid for one year at a time. Within this period, the company can issue bonus and can do stock splits. One of the other dimensions of any buyback proposal is that since no new shares can be issued, it effectively means that there will be no merger of any company with Reliance Industries. Because in a merger you will issue the same class of shares again which is not allowed. So no fresh issue of capital for three years, we have had nothing for six years, nine years of that and there is no question of any type of merger where Reliance is using its stock as currency for mergers and acquistions.

The options available for buying back shares is through a book building process, tender process and open market purchase process. In book building and tender process, promoters can participate in the buyback. The promoters of Reliance have already announced in the past their desire to increase their holdings in the company. The board has examined these three options and has decided to go through the open market transaction approach for buyback and in the open market purchase transaction route, the promoters will not participate in any buyback. The promoters will not tender in their shares in any buyback proposition which is allowed in the other two methods but we have chosen a method which does not allow the promoters to sell back their equity to the company.
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We would not want speculators to use Reliance as a hedge stock

I spoke about volatility and a clear message by buyback providing of a floor saying that we would not want speculators to use Reliance as a hedge stock. If you look at it just 20 trading sessions ago, the Reliance stock price was Rs 199 and today it is Rs 335-350. In these 20 days, nothing has changed. Why has the stock price gone up from Rs 199 to Rs 300-odd? So our message by providing buyback and providing a floor price - by saying we will put in Rs 1100 crore which will represent to be the largest ever buyback programme by any company in India and still be very, very conservative from the limit we have of Rs 3000 crore -- is that this is a company that is committed to long-term investors. We want investors to be sure that they will not be dealing with volatility and anybody who wants to speculate in the Reliance has to be clear that the company is standing by to buy the stock at Rs 303.
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Conclusion

In conclusion I would say that our buyback proposal is intended to send a clear signal to Reliance investors that we will reward them by returning cash. Our high growth rates and our motto of 'growth is life' will continue. We will have lower stock price volatility, we will improve our cost of capital and enhance our global competitiveness, we will work towards protecting the interest of long term shareholders by neutralising the impact of speculative forces and we will judiciously exercise share buyback to contribute to maximisation of overall shareholder value.
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