Ten big facts about Reliance buyback

India's largest private company Reliance Industries will consider a buyback of shares on January 20 when the company reports third quarter numbers.

The buyback is likely to be the biggest in India's history.

Buybacks are considered positive because they show that the management has belief in the company's performance.

Buyback helps to increase the value of shares as they reduce supply in the market. Stock of the firm closed 5 per cent higher on the NSE.

Reliance Industries had last announced a buyback in December 2004 (about seven years ago). The 2004 buyback program offered a premium of 10.87% over the share price just before the buyback announcement.

The size of the buyback program was kept at Rs 2,999 crore, which was about 10 per cent of the share capital plus free reserves as of 31st March 2004.

After the announcement of buyback on 28th December 2004, the company bought shares on nine days only. The total buyback done by the company was to the tune of about Rs 149.62 crore.

So, the actual buyback program was to the tune of just 5% of the total buyback size.

The average buyback price paid by the company worked out to about Rs 521.39 per share.

As the buyback program was through open market mechanism, the actual buyback price can be at a discount to the maximum buyback price (Rs 570).

The current share capital plus free reserves of company is about Rs 1,46,000 crore, as per the latest financials on 31st March 2011.

One can assume 10 per cent of this amount as the maximum buyback size.

That is, the buyback size this time can be about Rs 14,600 crore. However, the company may choose the buyback size in the range of Rs 10,000 crore to Rs 14,600 crore.

The current share price of the company is about Rs 770 per share. Assuming about 10% premium, the maximum buyback price may be fixed at about Rs 850 per share.

However, the company may choose the maximum buyback price in the range of Rs 850 - Rs 900 per share.

Investors should remember that there is no mandatory requirement that the company shall buy the entire amount of buyback.

In 2004, the company bought back only 5 per cent of the announced buyback program.

So, it is reasonable to expect that this will be largest ever buyback program in the history of Indian capital market.

Also, this buyback announcement will be a strong statement from the company's management that they "feel" currently the share price in the market is undervalued than the intrinsic worth.

Further, with about Rs 85,000 crore of cash on the books, the company is endowed with strong muscle to complete the buyback program.