Reliance Energy Ltd (REL) says that its board of directors today approved the company's proposed buy-back of outstanding equity shares up to approximately Rs2,000 crore ($500 million), in two phases through stock market purchases from time to time.

The company has announced that it would buy back the shares up to a maximum of Rs1,600 per share, representing a premium of over 30 per cent to the low of Rs1,225 recorded during the calendar year 2008, and a premium of approximately 10 per cent to today's closing share price.

The company said it would finance the share buy-back from its own cash balance and cash equivalents.

With the board's approval to the deal, the Anil Ambani-promoted company will buy back shares up to Rs800 crore in the first phase of the buyback or approximately 10 per cent of the paid-up equity share capital of the company, and its free reserves.

Thias will be followed by a second buyback of 15 per cent of the paid-up equity share capital and free reserves, expending approximately Rs1,200 crore, subject to shareholder and SEBI approvals.

Reliance Energy said in a regulatory filing that it would buy the shares on the Bombay Stock Exchange and National Stock Exchange, through "a transparent mechanism of open market purchases, from time to time".

The buyback, the company said, would contribute to improving shareholder value, while  reducing short-term volatility in the share price; deter speculation and, "send a strong signal to the capital markets on the perceived under-valuation of the company's share price".

The buyback will lead to a reduction in the outstanding number of equity shares, and consequently help the company boost its EPS and reflect an improvement in the return on net worth and other financial ratios. The buy back would also reduce the company's floating stock, contributing to higher valuations, and enhancing long term price performance;

Reliance said that the buy back would have no impact on leverage ratios, as the company is debt free at a net level.

The fully diluted equity capital of Reliance Energy is Rs279.53 crore. The shares purchased under the buy-back programme will be cancelled, as required under SEBI guidelines, leading to a reduction in the company's outstanding equity capital.