Will Reliance now extinguish its treasury stock?

Satish John & Vishal Chhabria

MUMBAI: Guess who’s the largest shareholder in Reliance Industries after Mukesh Ambani?  The answer: the company itself.

The Petroleum Trust, a special purpose vehicle (SPV) created to hold Reliance stocks when the company merged Reliance Petroleum with itself some five years ago, is sitting on 7.51% of Reliance shares currently valued at over Rs 14,000 crore. The trust is controlled by the management of Reliance and the stock it holds is beneficially held on behalf of Reliance shareholders.

A few little-known Reliance investment companies also hold additional treasury stock to the tune of around 3-4%, taking the total treasury stock to around 11-12%. This is what helps Mukesh Ambani raise his total controlling stake above 50%.

Now, with IPCL set to be merged with Reliance shortly, there is the prospect of the creation of more treasury stock. With Reliance holding 46% in IPCL, depending on the final swap ratio, the company could be holding another 2.5-3% of its own stock post-merger unless the shares are immediately extinguished.

On Saturday, the Reliance board will decide on the IPCL merger. If the treasury stock created after the merger is not extinguished, Reliance’s total treasury stock will rise by another 2-3%, taking the total to 14-15%.

“This (treasury stock) is the secret weapon that Mukesh Ambani will wield when he believes the time has come to raise financial resources to fund his audacious expansion plans,” says an analyst. Without diluting any equity, he can raise more than Rs 20,000 crore by placing the company’s treasury stock with financial investors.

But whether that will happen is anyone’s guess. If one goes by the theory that no promoter wants to dilute his own control, Ambani may be reluctant to let go of the treasury stock.

However, Mukesh Ambani’s proposal to make a preferential offer of shares to himself could be one indicator that he is planning to sell some of the treasury stock at some future date. The preferential offer will raise his stake to 54.55%, which will enable him to sell off some of the treasury stock without diluting control.

On Thursday, Reliance shares surged 3.53% to Rs 1,334.80 from Rs 1,289.35, a gain of Rs 45.45 per share. Reliance represents 11.24% of the Bombay Stock Exchange Sensex, and this is one reason why the index surged nearly 4% during the day.

The IPCL counter was even more euphoric after the announcement of the board meeting. The Vadodara-headquartered company’s shares gained handsomely in a bullish market by a whopping 12.15% to Rs 259.80 from Rs 231.65, a gain of Rs 28.15 per share.

Reliance Industries took a cue from ICICI Bank when its parent, the financial institution ICICI Ltd, decided to merge into its subsidiary. It then created a special purpose vehicle to hold the treasury stock, which was promptly liquidated to improve its net worth. Unlike ICICI Bank, though, Reliance has so far decided to keep its stake with itself.