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BW Businessworld

Boosting Sentiment

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Last year, the Reliance Industries (RIL) scrip had fared worse than the BSE Sensex, losing about a third of its value when the benchmark index lost 25 per cent. The latest move by RIL to buy back up to 120 million shares could buoy the falling scrip. The up to Rs 10,440-crore share buyback, from its size, is the largest in the history of Indian stockmarkets.

The Reliance board approved the buyback of shares at a maximum price of Rs 870 a share from open market, which is roughly 10 per cent premium over the last closing price of Rs 792.65 on 20 January. After full realisation of buyback, RIL's share base will shrink by 3.66 per cent.

The buyback could cushion the stock price, which closed at Rs 793.35 on Friday. After the first announcement on Wednesday, the stock leapt 5 per cent. RIL had announced a Rs 2,999 crore buyback in December 2004, but bought shares only for about Rs 150 crore as the price shot up above the buyback price. The buyback was fixed at a price not exceeding Rs 570 a share. But when it started the process in late July 2005, share price was at Rs 665. In nine days of buyback, the share price rose to Rs 742, leaving no hope for getting more shares from the public.

RIL has Rs 74,539 crore of cash reserve after December, while debt stood at Rs 74,503 crore, leaving the company debt free on a net basis. RIL has investment grade ratings for its international debt from Moody's and S&P as Baa2 and BBB, respectively. But its latest quarterly results have been below analysts estimates.

Despite having surplus cash reserves, RIL plans to raise dollar denominated funds. It is reportedly looking to raise $1 billion by selling bonds to foreign investors. Since August last year, the company has raised $3.5 billion through dollar-denominated term loans. Investment bankers say that the low cost of overseas debt attracts RIL in fund raising. When the cost of debt will only be between 2.25 and 2.5 per cent, RIL could earn at least 8-9 per cent by investing the fund in domestic deposits.

(This story was published in Businessworld Issue Dated 30-01-2012)