Reliance Industries sells another $573 million of treasury shares

Oil and gas producer Reliance Industries (RIL) has become the first Indian company to raise fresh capital from a share sale this year. The company, which is controlled by Mukesh Ambani and is India's largest company by market capitalisation, pocketed Rs26.8 billion ($573 million) by offloading a block of treasury shares before the market opened yesterday -- its second such sale in less than four months.

However, of the 25.85 million shares on offer, sources said 25 million was bought by Life Insurance Corporation of India (LIC), the country's largest life insurer and investor, meaning the deal cannot quite be described as a placement into the open market. Discussions with LIC supposedly started on Friday evening last week and the block was crossed before the opening yesterday. According to the Bombay Stock Exchange website, LIC held about 6% of RIL at the end of September.

The shares were offered at a fixed price of Rs1,035 apiece, which represented a 5.1% discount to last Thursday's close of Rs1,090.55 on the National Stock Exchange. The Indian markets were closed on Friday for the New Year's Day holiday.

The deal accounted for about 1.5% of RIL's outstanding issued share capital.

Although this was the second sale of treasury shares in just a few months, one source said the disposal should not be seen as an indication that the company is looking to offload all of its treasury shares. Rather, it was taking advantage of a market opportunity to realise funds that can be ploughed into other investments. At the time of the previous sale in mid-September, which was upsized by 50% and raised Rs13.88 billion ($658 million), analysts speculated that the company may be building a war chest for overseas acquisitions as returns from its domestic oil and gas fields have been stagnating. Aside from exploration, the company also owns downstream refining and petrochemical plants.

However, about a month after that sale, which was completed at a modest 2.7% discount to the market price, RIL announced a bonus issue that gave investors one new share for every existing share they held and said it would also pay a dividend of Rs13 per share. The bonus issue came after the share price had gained about 70% since the beginning of 2009, but some analysts suggested that the issue was a way for the company to say that it felt its shares were undervalued, hampered by an ongoing legal dispute between Mukesh and his brother Anil Ambani regarding the price at which RIL should sell natural gas to a company owned by Anil.

The bonus issue may also have been a way to counter a negative reaction to the earlier treasury share sale, which sparked some concern that the owners felt the share price had reached a cap.

Adjusted for the bonus issue, as of last Thursday, RIL's share price was marginally down from the Rs1,092 it trading at just before the previous sale of treasury shares. The share price dropped 1.4% after the block was announced yesterday, but never fell below the placement price and closed well above it at Rs1,075.5.

The treasury shares are held by the Petroleum Trust, which is a unit of RIL. Before this latest sale, the trust held about 5.5% of the company.

The deal was jointly arranged by Citi and Morgan Stanley. Citi was involved in the September sale as well, while Morgan Stanley replaced Bank of America Merrill Lynch, which acted as a joint bookrunner on the first deal.