Mumbai: Mukesh Ambani, promoter of Reliance Industries Ltd (RIL), India’s most valuable company by market capitalization, has raised the stake he controls in the firm by almost 5 percentage points over the past three years—from 46.75% in June 2005 to 51.37% in June 2008, according to shareholding data reported to stock exchanges.
The period is significant because it was in June 2005 that the Reliance group was formally split between estranged brothers Mukesh Ambani and Anil Ambani.
The 51% number looks significant because anything in excess of 50% gives promoters or promoting groups a simple majority in terms of ownership, but analysts say it isn’t really all that important a milestone.
TIGHTENING GRIP (Graphic)
“This number per se is not a holy figure and it does not give more power to the management in terms of decision-making,” said an expert in corporate law who does not want to be named.
Under corporate law, there is not much of a difference between 26% and 51% holding. A 26% stake itself gives promoters the power to block any resolution at board meetings.
An RIL spokesperson did not respond to an email query on the logic behind the promoters’ decision to increase the stake and the ultimate target.
Details on promoter stake in listed firms are published by the stock exchanges every quarter and includes so-called treasury stock or shares whose beneficiary is the firms themselves. After adjusting for treasury stock, the actual promoter stake in firms is much lower.
In case of RIL, the promoter stake of 51.37% includes a stake of 7.2% held by Petroleum Trust, whose beneficiary is Reliance Industrial Investments and Holdings Ltd, which in turn is a 100% arm of Reliance Industries.
In other words, the ultimate beneficiary owner of these shares is the company itself and not the promoters.
However, the fact remains that promoter holding in RIL has been steadily inching up since the split between the two brothers.
Analysts who track the Mumbai-based oil refining and gas mining behemoth say this is an instance of “value buying” and expect the promoters stake to rise further in the coming months, especially since promoters have an option to convert warrants at a 36% discount to current market price.
Value buying refers to picking company stocks when they are cheaper, expecting the price to rise in future. To be sure, in the case of RIL’s promoters, about 40% of the shares acquired in the past five years were acquired in the April-June quarter of 2006, when the markets had corrected sharply.
Apart from that surge in buying activity, Reliance’s promoters have been buying shares steadily across the three-year period.
Under Indian law, promoters can buy up to 5% equity in a listed company through market purchases or the so-called creeping acquisition mode every year. Over the past three years, while the promoters’ stake at RIL has risen, the shareholding of foreign institutional investors has gone down by more than 5%.
“Promoters do value buying when they find their shares are cheap but feel it will go up in the future on the back of growth prospects that they understand best,” said Rohit Nagraj, senior research analyst with Mumbai-based equity analyst firm Angel Broking Ltd, who has a “buy” rating on the stock and a target price of Rs3,344 per share.
On Friday, shares of RIL went up 1.51% to close at Rs2,245.65 on the Bombay Stock Exchange, while the benchmark index Sensex rose 1.11%, or 157.76 points, to close at 14,401.49.
Since January, shares of Reliance have fallen 22.0% and Sensex, 29.01%.
To be sure, RIL is not the only firm in which the promoters have been raising stakes. Seven out of the 22 firms that have remained part of the Sensex in the past three years have seen a rise in promoters’ holding during this period.
Six multinational firms that are part of the benchmark index have not been considered for this study. DLF Ltd and Reliance Communications Ltd have also been left out as the comparative data for them over last three years are not available as they are relatively new entrants in the Sensex. Similarly, among the local firms in 50-stock Nifty index, promoters’ shares have gone up in nine firms. All Sensex firms are part of Nifty.
A Mumbai-based sector analyst with a global equity firm, who did not wish to be named and has a “buy” rating on RIL with a target price of Rs2,850, said the promoters had continued to increase their stake, irrespective of the market sentiment being weak or strong. “We have been given no concrete reason for this (raising stakeholding) by the company management. Only if they (promoters) think the valuation can be higher, will they be doing it,” he reasoned.
Both Nagraj and this analyst say that there is an exceedingly high probability of the promoters consolidating their stake further as they are sitting on 120 million share warrants that have to be exercised by October . These warrants are priced at Rs1,402, at least 37.57% cheaper than the prevailing share price, and that makes their conversion into equity shares more attractive. If the warrants are converted, the stake of the promoters will rise by another 7.6 percentage points.