Unease over Reliance Retail buyback offer

Unease over Reliance Retail buyback offer

The proposal of Reliance Industries (RIL) to buy back shares of Reliance Retail (RRL) is legal, but it hasn’t gone down well with a section of stakeholders who feel the company should have avoided a “forced buyout”.

Shriram Subramanian, founder and MD, InGovern Research Services, toldFE: “This is a forced buyout of minority shareholders of RRL by Reliance Retail Ventures (RRVL). The minority shareholders of RRL would be disappointed as the price is much lower than the current trading prices in the grey market.”

The buyback price was at a premium of Rs 477.97 and Rs 512.92 a share as determined by two independent valuers — E&Y and BDO Valuation Advisory — who valued it at Rs 884.03 and Rs 849.08 a share, respectively. RRVL, in which RIL holds an 85.06% stake, owns 99.93% in RRL. The other 7.86 million shares are with minority shareholders.

This capital reduction exercise with the shareholders getting cash in lieu of shares should easily sail through. While there have been no such moves by other large corporates, many small firms have done this at the time of delisting for promoters to own 100%, Subramanian said.

Shareholders who had either bought the shares from the grey market or employees who received them as stock options have no option but to accept the offer. The shares were trading at Rs 2,500-2,700 in the unlisted space. On conclusion of the offer, RIL will extinguish the shares.

MS Sahoo, distinguished professor at National Law University, Delhi, and former chairperson of Insolvency and Bankruptcy Board of India, said it is a normal business strategy to buy back shares or reduce capital. “The law provides an elaborate process for this. There are checks and balances to ensure that no one is short-changed”. He said since Reliance Retail is an unlisted company, the exiting shareholders need to be paid as per valuation norms under the company law, not Sebi norms that apply to listed companies. The process requires shareholders’ approval by a special resolution and subsequent approval of the National Company Law Tribunal.

On the chances of retail shareholders objecting to the move, he said: “It is an unlisted firm with 99.9% of shares with promoters. Non-promoter shares are traded in the grey market, where price discovery is not transparent and liquidity is limited. It is, therefore, unlikely that non-promoter shareholders would resist the move, particularly when the proposed exit price is much higher than the minimum required under the law.”

Sahoo, however, said a buyback reduces the buffer available to creditors. “Therefore, it is not allowed when a company has outstanding debt, unless creditors agree or their interests are secured.”