Like a lot of other things – I came to know about the Reliance Industries (RIL) proposed share buyback program from a comment here.
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. Â 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.
15 thoughts on “Reliance Industries Share Buyback: What should you look for?”
What we can import from switzerland to india please give me some informations so we can start business.
Khushi Seerwani & Daughters
I was just looking for this info..thanks a lot
Sir, me phli bar stock market me share buy/ghredna chata hu to eske bare me btay ki esk liye mugh kon-kon se douoment cheye sothat me online investment kar squ?
I have RIL shares in demat, who will a retail investor can sell @ buyback price ?
From what I’ve read so far it is the type of offer where RIL will go to the market and buy the shares from there so there is no way for an investor to offer them your shares and ask them to buy it.
But in market the price is lesser than 870 so how can we sell @ 870, will the price rise upto 870 in near future.
Thanks for the timely and well-written article. Very informative.
Thanks Ashok – I think the big risk with these kind of announcements is that people go overboard in their expectation and start inferring a lot of things which stretch the imagination and then end up in a bad situation. I think it will be useful for everyone to just spend some time and think about the facts without getting an opinion on the situation from ‘experts’.
Just a simple question.
suppose reliance industries says they will buyback from public 100 shares at maximum price of 800.
Suppose person A tenders 100 shares at 700
Suppose person B tenders 100 shares at 600.
Would RIL buy 100 shares from B at 600?
Would RIL buy
50 shares from A at 800 And
50 shares from B at 800?
Would RIL buy
50 shares from A at 700 And
50 shares from B at 600?
Don’t know yet, when the details emerge – I’ll update the post or perhaps write a new one.
They are going to buy the stock from the stock market so this isn’t applicable any longer but it looks like the company is bound to buy it proportionately from everyone who tenders the shares regardless of how many shares they own.
A link to SEBI’s FAQ on buyback
Quoting from the article on businesstoday
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.
If they do decide to carry an open market operation then investors are much better off ignoring this news altogether.
Very useful infomation, timely as usual. Why is RIL going for buy back? It seems
Given the prolonged underperformance in the stock and the huge cash chest at its disposal (USD 12.6 billion as on September 30, 2011), a share buyback seemed the most logical move to instill confidence among its shareholders.
From a high of Rs 1245 in May 2009, the stock is down around 36%, as the company grapples with falling gas output at its KGD6 block, pricing/cost recovery dispute with the government and insider trading allegations.
One of my first bosses told me that a performance appraisal is not a review for the last year but an incentive for the next.
I think that fits in here nicely, whatever the past movement – they want to provide some support to the price going forward and that’s why the announcement.