The details will be out on the 20th but this is a good time to take stock of what a share buyback program entails and what are the things you should look out for.
The first thing is to find out is what type of share buyback offer this will be. As I wrote earlier – there can be two types of share buyback programs – one where the company buys the shares through the stock exchange and the second where they send out a form to their shareholders and ask them to tender their shares for the buyback.
If RIL decides to carry out the buyback program from the stock market then they would indicate a maximum price that they are willing to pay to buy the shares, and carry out purchases from the stock market periodically as long as the share price is below the maximum price they have decided. So, they could say that the company will buy shares as long as the price is below Rs. 1,000. This means that the company is allowed to exercise the buyback as long as the shares are under Rs. 1,000. They could buy it at Rs. 780 or Rs. 900 or any other price as long as it’s below Rs. 1,000.
They will also indicate a maximum amount that they can spend on the buyback but they are not obliged to reach that amount using the buyback. So, they may say that they will spend Rs. 1,000 crores on the buyback but that doesn’t mean they have to necessarily spend the Rs. 1,000 crore on the buyback – they can stop after spending Rs. 500 crore or just Rs. 10 crores.
If Reliance Industries decides to carry out the buyback by asking their shareholders to tender their shares – then they will set up a price at which the shareholders can tender their shares and the company will most probably buy a portion of the shares from the shareholders at this price.
So, in this case the company could say that they will exercise the buyback at Rs. 830 and send you a tender form to see if you’re interested or not. You fill up the form and tell them that you are interested to sell the 100 shares you have but so does everyone else. The company is not looking to completely delist, just buyback a part of its share capital so it will partially accept your tender offer – say buyback 50 of your 100 shares. How many shares they buyback depends on the response to their offer. People who have invested in IPOs can equate this to IPO allotments where you could apply for shares worth Rs. 1 lakh but get only shares worth Rs. 6,000 due to the huge response.
The takeaway from this post should be that you can’t just buy some Reliance shares from the stock market and turn around and sell it to Reliance Industries for a quick buck.
There are many nuances to how a share buyback works and you should familiarize yourself with them so you can ask the rights questions and evaluate the buyback offer yourself. As more details emerge, I will update this post or write a new one with the methodology they are using as well as the numbers.
You can read these two posts I wrote earlier if you’re interested to know more about buybacks in general.