Share buybacks surge despite stringent norms by regulator

MUMBAI: There has been a sudden surge in buybacks in mid-level and large companies since July, defying market view that buyback offers are likely to come down because of the stringent norms imposed by the market regulator. Buybacks up to Rs10,500 crore have been announced in the past five months, against Rs498 crore between January and June, and Rs2,603 core in 2012 (excluding Reliance Industries). Experts attribute this trend to a sharp decline in share prices and the excess cash with companies which they do not want to use as capital expenditure.

“As many stocks are trading at much lower valuations than their nominal price, it makes sense for cash-rich companies to buy back shares to improve the return on equity ratio,” said Dara Kalyaniwala, VP ( Investment Banking), Prabhudas Lilladher Capital Markets.

Since buyback reduces outstanding shares, it boosts earnings per share and, therefore, the share price. Cairn India, Jindal Steel, NHPC, GE Shipping, Bayer Cropscience, Crompton & Greaves, Aptech and eClerx Services are some of the companies that have announced buybacks since July. Cairn India is the latest to announce buyback last week amounting to Rs5,725 crore at a price of Rs335 per share. Its current market price is Rs319, and it has net cash of around Rs20,000 crore. Jindal Steel, whose share price crashed from Rs462 ealrier this year to Rs186 in August, announced a buyback of shares at Rs261 in September, following which it recovered and is currently trading at Rs282.
“Many of these large companies are not keen to deploy cash lying in their balance sheet in capex for at least a year due to economic uncertainties,” said Avinash Gupta, senior director & leader, financial advisory, Deloitte. “Buyback is one of the better methods to utilise unused cash, and at the same time, increase promoter holding.”

Interestingly, Bayer Cropscience announced buyback through the tender offer route, which will also enable its promoters to participate in it. It is believed the promoters will also tender a part of their shares in the offer so that the their post-offer stake does not breach the 75% mark. Companies can execute share buybacks either through the tender route or through the open market route, which doesn’t allow promoters to participate in the buyback.

NHPC also announced buyback through the tender offer. “A buyback is an attractive way to distribute surplus funds, more taxeffective than dividends. It provides liquidity to shareholders looking for an exit, and allows committed shareholders to consolidate their holdings,” said Ravi Sardana, EVPinvestment bank at ICICI Securities.

“A buyback also has a signalling impact as it reflects the company’s confidence in its stock value.” In June, Sebi had tightened rules for share buybacks by mandating companies to buy at least 50% of the offer size, failing which they will have to forfeit 2.5% of the total amount earmarked.