Cairn India Ltd board will on Tuesday consider a proposal to buy back shares, a move which will help promoters Vedanta Group increase its stake in the company without putting any money.
Cairn, which is sitting on a cash pile of about $3 billion, in a filing to the stock exchanges said "a meeting of the Board of Directors of the company will be held on November 26, 2013, to consider the proposal for buy back of equity shares of the company."
Share buy-back is the process where a company repurchases outstanding shares in order to reduce the number of shares on the market.
Companies, as a rule, buy back shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake.
As per Sebi rules, Cairn will buy a pre-decided quantity of shares from the market at a rate which is likely to be higher than current trading price. Such shares will be held as treasury stock and eventually extinguished.
This will lead to its promoter Vedanta Group's stake in the company going up without putting any money.
Steel billionaire Anil Agarwal-led Vedanta Group holds 58.76 per cent stake in Cairn India.
UK's Cairn Energy plc, which had sold majority stake in Cairn India to Vedanta Group, still holds 10.27 per cent shares and may look at the share buy back programme to exit.
Vedanta Group had bought stake in Cairn India at Rs. 355 per share, a price the company stock has not touched in last one year.
"Cairn Energy is a known seller for long time and the share buy back may present it with an opportunity to exit from Cairn India," an analyst said.
While share buy-back is considered an efficient means of returning capital to shareholders, it also indicates that the company is not looking at doing major acquisitions or has significant capex plans that may need its current cashpile.
Analysts said Vedanta holds 112.27 crore shares out of a total of 191.05 crore outstanding shares of Cairn India. Cairn UK Holdings Ltd has 19.61 crore shares while Life Insurance Corp (LIC) has 16.77 crore (8.78 per cent) shares.
ICICI Prudential hold 1.08 per cent shares while foreign institutional investors (FIIs) have 15.14 per cent holding. Financial institutions and banks have 8.7 per cent. Analysts said in case Cairn India buys 10 per cent of 19.10 crore shares in the buy-back programme and extinguishes them, the total outstanding shares will come down to 171.945 crore. The reduced outstanding shares would mean that Vedanta
Group's stake would rise to about 65.3 per cent without it buying any new shares.
Cairn, which produces over 1,75,000 barrels per day of oil or a quarter of India's crude oil production, was up Rs. 9.45 (2.98 per cent) at Rs. 326.70 at 1300 hours on the BSE.